Tax Fraud

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IRS Tax Liens - continued 2
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Tax Fraud

CC-2005-012 ]

Overview - General Tax Fraud


The term voluntary compliance means that each of us is responsible for filing a tax return when required, and for determining and paying the correct amount of tax. Fortunately, the vast majority of Americans recognizes their legal responsibility, and properly report and pay over their tax obligations.


The efforts of Criminal Investigation (CI) are directed at the portion of American taxpayers who willfully and intentionally violate their known legal duty of voluntarily filing income tax returns and/or paying the correct amount of income, employment, or excise taxes. These individuals pose a serious threat to tax administration and the American economy.


The General Fraud Program is Criminal Investigation's largest enforcement program encompassing a wide variety of investigations involving tax and money laundering crimes. This program includes investigations involving a broad spectrum of individuals and industries from all facets of the economy, from small business owners to self-employed to large corporations. General Fraud cases constitute the main component of CI's efforts to most directly influence taxpayer compliance with the Internal Revenue Code.


General Fraud is the program from which CI identifies emerging areas of non-compliance in both Legal Source Tax Crimes and Illegal Source Financial Crimes. These emerging areas are instrumental in ensuring CI is focusing resources to most effectively achieve our mission.


Legal Source Tax Crimes involve legal industries and legal occupations, and more specifically, legally earned income, in which the primary motive or purpose is the violation of tax statutes (United States Code Title 26 and Title 18, Sections 286, 287, and 371K). The Legal Source Tax Crimes Program also includes cases that threaten the tax system, for example frivolous filers/non-filers, unscrupulous return preparers and the Questionable Refund Program.


The Illegal Source Financial Crimes Program recognizes that illegal source proceeds, which are a part of the untaxed underground economy, are a threat to the voluntary tax compliance system. Failure to investigate these cases would erode public confidence in the tax system. Within the guidelines of the Illegal Source Financial Crimes Program, CI commits resources to those investigations that involve proceeds derived from illegal sources other than narcotics. This program encompasses all tax and tax-related violations (Title 26 and Title 18, Sections 286, 287, and 371K), as well as money laundering (Title 18, Sections 1956, 1957, and 371M) and currency violations (Title 31). Linked to the investigation of the criminal charges within this program is also the emphasis for the effective utilization of the forfeiture statutes to deprive individuals and organizations of illegally obtained assets.


Tax Preparer Fraud


FS-2005-8, January 2005

Return Preparer Fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may also manipulate income figures to obtain fraudulent tax credits, such as the Earned Income Tax Credit.

In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return, the taxpayer must pay the additional taxes and interest and may be subject to penalties and criminal prosecution.

The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution and/or asserting appropriate civil penalties against unscrupulous return preparers.

While most preparers provide excellent service to their clients, the IRS urges taxpayers to be very careful when choosing a tax preparer. You should be as careful as you would in choosing a doctor or a lawyer. It is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return.

Helpful Hints When Choosing a Return Preparer

  • Avoid tax preparers who claim they can obtain larger refunds than other preparers

  • Avoid preparers who base their fee on a percentage of the amount of the refund.

  • Use a reputable tax professional who signs your tax return and provides you with a copy for your records.

  • Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.

  • Review your return before you sign it and ask questions on entries you don't understand.

  • No matter who prepares your tax return, you (the taxpayer) are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.

  • Find out the person’s credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared. (Additional text in italics added Feb. 4, 2005 .)

  • Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

  • Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?

IRS cautions taxpayers to be wary of claims by preparers offering larger refunds than other preparers. Check it out with a trusted tax professional or the IRS before getting involved.

Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.

Criminal Investigation Statistical Information


FY 2002

FY 2003

FY 2004

Investigations Initiated




Prosecution Recommendations












Incarceration Rate*




Avg. Months to Serve




*Incarceration may include prison time, home confinement, electronic monitoring, or a combination.

Criminal and Civil Legal Actions

The following case summaries are excerpts from public record documents on file in the court records in the judicial district in which the legal actions were filed.

Tax Preparer Sentenced to 33 Months
On Dec. 16, 2004 , in Hartford , Conn. , Patrick A. Triumph, a self-employed tax return preparer, was sentenced to 33 months in prison to be followed by three years supervised release. In July 2004, Triumph was indicted on 38 counts of aiding and abetting in the preparation of false tax returns, one count of interfering with the administration of IRS laws and one count of knowingly and willfully failing to appear in court when required. Triumph was found guilty by jury on Sept. 20, 2004 , on 10 counts of aiding and abetting in the preparation of false tax returns.

Court Bars South Florida Man From Selling Bogus Trusts and Preparing Federal Tax Returns for Others
On Dec. 3, 2004 , in Ft. Lauderdale, Fla., Louis Ratfield of Lake Worth, Fla., was permanently barred by a federal court from preparing federal income tax returns for others and from representing customers before the IRS .  Ratfield also was barred from selling a fraudulent tax scheme involving sham trusts.  According to papers filed in the case, Ratfield told customers they could use his trusts to get “tax deductions for the expenses incurred in being alive.”

Court Bars Ohio Men’s Fraudulent Tax Schemes
On Nov. 8, 2004 , in Akron, Ohio, James L. Binge and Terrence A. Bentivegna were permanently barred by a federal court from preparing income tax returns for customers and from representing customers before the IRS . The court found that the two Canton-area men prepared income tax returns that hid customers’ income and claimed improper deductions. They also sold sham trusts and falsely advised customers that they need not report income earned within the United States . Binge and Bentivegna were also barred from selling or promoting tax fraud schemes. 

Sacramento Tax Preparer Sentenced to 21 Months in Prison for False Tax Return Scheme
On Nov. 4, 2004 , in Sacramento, Calif., Brent Daniel Shaw was sentenced to 21 months in prison in connection with his participation in a scheme involving the filing of false returns with both the California Franchise Tax Board (FTB) and the Internal Revenue Service ( IRS ). Shaw pleaded guilty to mail fraud, aiding and assisting in the preparation of a false income tax return and forging endorsements on treasury checks. Shaw admitted that he would provide his tax return clients with a correct copy of their state and federal income tax returns, and then would alter the returns prior to actually sending them in to the FTB and the IRS . The returns Shaw submitted without the knowledge and consent of his clients included bogus deductions to reduce the taxpayers’ state and federal tax liability, which in turn caused the issuance of larger refunds than were actually due. Upon receipt of falsely inflated refund checks, which Shaw directed the IRS and FTB to mail directly back to him, Shaw would forge his clients’ signatures and personally deposit or cash the refund checks. Shaw then issued new checks to his clients for the amount of the refund they were led to believe they were getting. Shaw improperly kept the difference between the correct refund amount and the fraudulent and inflated refund amount. 

Irving , Texas , Tax Preparer Sentenced
On Oct. 21, 2004 in Irving , Texas , Leanne Denice Shrout was sentenced to 36 months in prison following her guilty plea in May 2004. Shrout, who operated Executive Financial Consultants, pleaded guilty to three counts of aiding and assisting in the preparation and presentation of a false and fraudulent tax return.

Shrout was a trained tax return preparer however, she would inaccurately and falsely advise and counsel her clients that the following things were deductible on the Schedule A form: personal clothing worn to work; personal hygiene items; vitamins; gym fees; haircuts; manicures and pedicures; mileage to and from work; and money spent at restaurants. Shrout also admitted she prepared amended tax returns for clients using basically the same methodology and claiming the taxpayer was owed more. She admitted to preparing at least 788 false tax returns or false amended tax returns approximately beginning in 1999 and continuing through June 2002.

Court Stops Fraudulent Tax-Return Preparer
On Oct. 19, 2004 , in Norfolk , Va. , Ronald M. Green was permanently barred by a federal court from preparing federal income tax returns for others and representing people before the IRS .  The court found that Green had prepared fraudulent tax returns for customers in Virginia , Maryland , Pennsylvania , New York , South Carolina , Alabama , Texas , Arizona and California

Hamden Tax Preparer Sentenced to Four-Year Federal Prison Term
On Oct. 13, 2004 , in New Haven, Conn., John K. Cannon was sentenced to 48 months in prison followed by one year of supervised release for assisting clients of his tax preparation business with filing materially false federal income tax returns and for failing to file his own federal income tax return for the 2001 calendar year. Cannon was also ordered to pay all back taxes with any penalties and interest and accepted a permanent injunction that will bar him from engaging in the business of preparing income tax returns or from further acting as an income tax preparer in the future. Cannon, who had been self-employed as a tax preparer for approximately 40 years, admitted that between 1999 and 2001, he willfully prepared hundreds of federal income tax returns in which he falsely represented that his clients were lawfully entitled to claim itemized deductions, business expenses, rental expenses and other deductions to which they were not entitled. Cannon also acknowledged that he intentionally sought to interfere with the Internal Revenue Service's ability to investigate and audit his preparation of those returns and that as a result of his actions he deprived the IRS of nearly $1 million in tax revenue. Cannon further admitted that he willfully failed to file his own income tax return for the calendar year 2001, as required by law, despite earning more than $250,000 from his tax preparation business that year.




Federal Statutes - Money Laundering


Internal Revenue Code

IRS has sole investigative jurisdiction for criminal violations of the Internal Revenue Code (IRC), Title 26 of the United States Code. The IRC, Section 61(a) defines gross income as ". . . all income from whatever source derived." This has been held by the courts to include income earned from illegal activities such as drug trafficking, embezzlement, extortion, healthcare fraud, bankruptcy fraud and numerous other crimes. The primary criminal statutes include evasion of income tax, false income tax returns, and failure to file tax returns, among others.

Additionally, IRC, Section 6050 I, requires anyone involved in a trade or business, except financial institutions, to report currency received for goods or services in excess of $10,000 on a Form 8300. This requirement has created a significant impediment to the use of illicit profits by narcotics traffickers and others engaged in illegal activity for the purchase of luxury items such as vehicles, jewelry and boats. Financial institutions report similar information on a Currency Transaction Report.

Federal Statutes and Acts Passed by Congress

Title 31, USC Section 5331 – was passed in 2001 as a result of the USA Patriot Act and duplicates the reporting provisions of IRC, Section 6050I (Form 8300). Dual reporting of this information will now be made to both the IRS and the Treasury Department's Financial Crimes Enforcement Network (FinCEN).

Title 31 USC Section 5332 –Also as a result of the USA Patriot Act was the passage of Title 31 USC 5332, Bulk Cash Statute. Criminal Investigation has jurisdiction to investigate violations of this statute. This affects anyone who transports or attempts to transport currency or other monetary instruments of more than $10,000, from a place within the United States to a place outside of the United States, or from a place outside the United States to a place within the United States, and knowingly conceals it with the intent to evade the reporting requirements of 31 USC 5316. 

Title 18 USC Section 1960 IRS has the jurisdiction to investigate violations under Title 18 USC 1960 which requires Money Service Businesses to be registered with the Federal Government.

Bank Secrecy Act – The Currency and Foreign Transactions Reporting Act, Public Law No. 91-508, Title II, along with financial institution record-keeping requirements, became known as the Bank Secrecy Act (BSA). The BSA mandates the reporting of certain currency transactions conducted with a financial institution, (Form 4789), the disclosure of foreign bank accounts (TD F 90-22.1), and the reporting of the transportation of currency exceeding $10,000 across United States borders (Form 4790).

Money Laundering Control Act of 1986 – Criminal Investigation investigates and recommends criminal prosecution for violations of Title 18, USC , Sections 1956 and 1957. These statutes make it illegal to conduct certain financial transactions with proceeds generated through specified unlawful activities, such as narcotics trafficking, Medicare fraud and embezzlement, among others.

Asset Forfeiture – The asset forfeiture program is one of the federal government’s most effective tools against drug trafficking, money laundering, and organized crime. In conjunction with other federal, state, and local law enforcement agencies, Criminal Investigation uses asset forfeiture statutes to dismantle criminal enterprises by seizing and forfeiting their assets. Most of Criminal Investigation's seizures and forfeitures are the result of Title 18 and Title 31 money laundering and currency investigations. 


Table of Contents

  • 25.1   Fraud Handbook
    • 25.1.1   Overview/Definitions
    • 25.1.2   Recognizing and Developing Fraud
    • 25.1.3   Criminal Referrals
    • 25.1.4   Joint Investigation
    • 25.1.5   Grand Jury Investigations
    • 25.1.6   Civil Fraud
    • 25.1.7   Failure to File
    • 25.1.8   Collection Function
    • 25.1.9   Tax Exempt and Government Entities (TEGE)
    • 25.1.10   LMSB Fraud Procedures  (01-01-2003)

1.       This section provides an overview of fraud as well as defines and details the elements of fraud.

2.       This handbook is a comprehensive guide for employees in the Small Business/Self-Employed ( SBSE ), Tax Exempt/Government Entities (TEGE), Wage & Investment (W&I), Large & Mid-Size Business (LMSB) and Criminal Investigation (CI) organizations. This guide covers the recognition and development of potential fraud issues, referrals for criminal fraud, duties and responsibilities in joint investigations, civil fraud cases and other related fraud issues.

3.       The primary objective of the fraud program is to foster voluntary compliance through the recommendation of criminal prosecutions and/or civil penalties against taxpayers who evade the payment of taxes known to be due and owing.

4.       The discovery and development of fraud cases are a normal result of effective investigative techniques. Techniques employed by compliance employees should be designed to disclose not only errors in accounting and application of tax law, but also irregularities that indicate the possibility of fraud.

5.       Generally, for fraud to be considered the compliance employee must show:

A.      An additional tax due and owing due to deliberate intent to evade tax; or

B.      The willful and material submission of false statements or false documents in connection with an application and/or return.

6.       The fraud referral specialist ( FRS ) plays a vital role in the development of a potential fraud case. The FRS will be consulted in all cases involving potential criminal fraud, as well as those cases that have potential for a civil fraud penalty. The FRS serves as a resource person and liaison to compliance employees in all the business organizations. The FRS is available to assist in fraud investigations and offer advice on matters concerning tax fraud to all business organizations. When a compliance employee suspects a potentially fraudulent situation, the employee will discuss the case at the earliest possible opportunity with his/her manager. If the group manager concurs, the FRS will immediately be contacted and both the group manager and FRS will provide guidance to the compliance employee on how to proceed. Managers will encourage the early involvement of the FRS in all potential fraud cases.  (05-19-1999)
Definition of Fraud

1.       Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, resulting in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit.

2.       Tax fraud is often defined as an intentional wrongdoing on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both:

·         An underpayment; and

·         A fraudulent intent.  (01-01-2003)

1.       The compliance employee must be familiar with the following legal terms in order to understand the requirements of proof:

A.      Burden of Proof is the obligation to offer evidence that the court or jury could reasonably believe in support of a contention. In tax fraud cases, the burden of proof is on the Government.

B.      Evidence is data presented to a court or jury in proof of the facts in issue and which may include the testimony of witnesses, records, documents, or objects. Evidence is distinguished from proof in that the latter are the result or effect of evidence.

C.      Direct Evidence is evidence in form of testimony from a witness who actually saw, heard, or touched the subject of questioning. Evidence, which is believed, proves existence of fact in issue without inference or presumption.

D.      Circumstantial Evidence is evidence based on inference and not personal observation.

E.      Presumption (of law) is a rule of law that courts and judges will draw a particular inference from a particular fact, or from particular evidence, unless and until the truth of such inference is disproved.

F.      Inference is a logical conclusion from given facts.

G.     Preponderance of evidence is evidence that will incline an impartial mind to one side rather than the other so as to remove the cause from the realm of speculation. It does not relate merely to the quantity of evidence. Simply stated, evidence which is more convincing than the evidence offered in opposition.

H.      Reasonable doubt is a doubt founded upon a consideration of all the evidence and must be based on reason. Beyond a reasonable doubt does not mean to a moral certainty or beyond a mere possible doubt or an imaginary doubt. It is such a doubt as would deter a reasonably prudent man or woman from acting or deciding in the more important matters involved in his or her own affairs.

I.         Willful Intent to Defraud is an intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be properly owing.

J.       Clear and Convincing Evidence is evidence showing that the thing to be proved is highly probable or reasonably certain. This is a greater burden of proof than preponderance of the evidence but less than beyond a reasonable doubt.  (05-19-1999)
Requirements of Proof

1.       Understanding the requirements of proof is essential in establishing fraud. In all criminal and civil fraud cases, the burden of proof is on the Government.

2.       The major difference between civil and criminal fraud is the degree of proof required.

A.      In criminal cases, the Government must present sufficient evidence to prove guilt beyond a reasonable doubt.

B.      In civil fraud cases, the Government must prove fraud by clear and convincing evidence.  (05-19-1999)
Civil vs. Criminal

1.       Civil fraud cases are remedial actions taken by the government such as assessing the correct tax and imposing civil penalties as an addition to tax, as well as retrieving transferred assets. Civil penalties are assessed and collected administratively as a part of tax.

2.       Criminal fraud cases are punitive actions with penalties consisting of fines and/or imprisonment. Criminal penalties:

·         Are enforced only by prosecution;

·         Are provided to punish the taxpayer for wrongdoings; and

·         Serve as a deterrent to other taxpayers.

3.       One tax fraud offense may result in both civil and criminal penalties.  (05-19-1999)
Avoidance vs. Evasion

1.       Avoidance of tax is not a criminal offense. Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent, but shapes and preplans events to reduce or eliminate tax liability within the perimeters of the law.

2.       Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts are deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.

3.       Common evasion schemes include:

·         Understatement or omission of income,

·         Claiming fictitious or improper deductions,

·         False allocation of income, and/or

·         Improper claims, credits, or exemptions.  (05-19-1999)
Indicators of Fraud

1.       Taxpayers who knowingly understate their tax liability often leave evidence in the form of identifying earmarks (or indicators).

2.       Fraud indicators can consist of one or more acts of intentional wrongdoing on the part of the taxpayer with the specific purpose of evading tax. Fraud indicators may be divided into two categories: affirmative indications or affirmative acts. No fraud can be found in any case unless affirmative acts are present.

3.       Affirmative indications serve as a sign or symptom, or signify that actions may have been done for the purpose of deceit, concealment or to make things seem other than what they are. Indications in and of themselves do not establish that a particular process was done; affirmative acts also need to be present. Examples include substantial unexplained increases in net worth, substantial excess of personal expenditures over available resources, and bank deposits from unexplained sources substantially exceeding reported income.

4.       Affirmative acts are those actions that establish that a particular process was deliberately done for the purpose of deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than what they are. Examples include omissions of specific items where similar items are included, concealment of bank accounts, failure to deposit receipts to business accounts, and covering up sources of receipts.  (05-19-1999)
Criminal Statutes

1.       Willfulness is a common element of tax crimes. Willfulness is defined as a voluntary, intentional violation of a known legal duty. A good faith misunderstanding of the law or good faith belief that one is not violating the law negates willfulness.

2.       The Exhibit 25.1.1–1 is a listing of the elements necessary for the most common statutes under which criminal prosecution is recommended by CI. These elements were taken from the statutes.

Exhibit 25.1.1-1  (01-01-2003)
Criminal Violations

Criminal Statutes


Elements Necessary For Prosecution

Title 26 USC Section 7201 (Evasion) Felony


(1) Willfulness
(2) Attempt to evade or defeat (usually involves concealment or deception) tax or payment thereof
(3) Tax deficiency

Title 26 USC Section 7202 (Trust Fund Violation—Willful Failure to Collect or Pay Over Tax) Felony


(1) Willfulness
(2) Requirement to collect, truthfully account for, and pay over employment taxes
(3) Either failure to collect any tax or failure to truthfully account for and pay over any tax or both

Title 26 USC Section 7203 (Failure to File or Failure to Pay) Misdemeanor


(1) Willfulness
(2) Requirement to file a return, pay an estimated tax or tax, maintain records, or supply information
(3) Failure to file a return, pay an estimated tax or tax, maintain records, or supply information

Title 26 USC Section 6050I in Conjunction with 26 USC Sections 7203 and 7206 (Trade or Business Required to File a Form 8300 for Receiving More Than $10,000 Cash) Felony


(1) Willfulness
(2) Subject to reporting requirement relating to cash of more than $10,000 received in trade or business
(3) Evasion of reporting requirement by:
Causing a trade or business to fail to file report, or
b. Causing
a trade or business to file false report, or
c. Structuring transactions
to avoid report

Title 26 USC Section 7204 (Employee Wage Statements) Misdemeanor


(1) A duty to deduct employment tax or to withhold income tax (26 USC 3102(a), 3402(a)
(2) A duty to timely furnish to the employee a written statement showing specified information concerning the deductions (26 USC 6051)
(3) Furnishing a false or fraudulent statement to an employee, or the failure to furnish a statement to an employee at the required time and in the required manner
(4) Willfulness

Title 26 USC Section 7205 (False W–4) Misdemeanor


(1) A duty to supply information to employer (26 USC 3402(f)(2)
(2) Furnishing false or fraudulent information or failure to supply information which would require an increase in tax to be withheld
(3) Willfulness

Title 26 USC Section 7206(1) (False return) Felony


(1) Making and subscribing a return, statement or other document under penalty of perjury
(2) Knowledge that it is not true and correct as to every material matter
(3) Willfulness

Title 26 USC Section 7206(2) (Assisting in Preparation of False Return) Felony


(1) Aiding or assisting in, producing, counseling, or advising the preparation or presentation of a document in connection with matters arising under the internal revenue laws
(2) The document was false as to a material matter
(3) Willfulness

Title 26 USC Section 7206(4) (Removal or Concealment with Intent to Defraud) Felony


(1) Tax imposed on property
(2) Property on which tax is imposed or will be imposed or levy is authorized
(3) Removal or concealment
(4) Intent to evade or defeat assessment or collection of tax

Title 26 USC Section 7206(5) (Compromises & Closing Agreements) Felony


(1) Willful concealment of property or
(2) Willful withholding, falsifying and destroying records.
(3) Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement.

Title 26 USC Section 7207 (Submission of False Documents) Misdemeanor


(1) Wilfulness
(2) The delivery or disclosure to any officer or employee of the Internal Revenue Service of any list, return, account, statement, or other document
(3) The return, statement, or other document is false or fraudulent as to a material matter
(4) Knowledge of material falsity

Title 26 USC Section 7212(a) "Omnibus Clause" ) Felony


(1) A corrupt effort, endeavor, or attempt
(2) To impede, obstruct or interfere with
(3) Due administration of Title 26

Title 26 USC Section 7212(a) (Corrupt or Forcible Interference) Felony or Misdemeanor


(1) Use of force or treats of force
(2) To intimidate, impede or obstruct
(3) An officer or employee of the U.S. acting in official capacity under Title 26

Title 26 USC Section 7212(b) (Forcible Rescue of Seized Property) Felony


(1) Forcible rescue or attempt to forcibly rescue
(2) Seized property
(3) Knowledge of seizure

Title 26 USC Section 7215 (Collection & Paying Tax) Misdemeanor


(1) The taxpayer was a person required to collect, account for, and pay over income tax withholding on wages and FICA taxes
(2) The taxpayer was notified of the failure to collect, account for, and pay over
(3) The taxpayer failed to collect, account for, and pay over the taxes, while not entertaining a reasonable doubt as to whether the law required the taxpayer to do so, and the failure was not due to circumstances beyond the taxpayer’s control

Title 26 USC Section 7232 (Failure to Register) Felony


Fails to register in connection with taxable purchase — diesel fuel and special motor fuels or
Falsely represents that he is registered or
Willfully makes false statement in an application for registration.

Title 18 USC Section 2 (Aiding and Abetting) Felony or Misdemeanor


(1) The taxpayer associated with the criminal venture
(2) The taxpayer knowingly participated in the venture, and
(3) The taxpayer sought by his or her actions to make the venture succeed

Title 18 USC Section 152(1) (Concealment of Property) Felony


(1) The bankruptcy proceeding was in existence;
(2) The defendant fraudulently concealed the property from the custodian; and
(3) The property belonged to the bankruptcy estate.

Title 18 USC Section 152(2) (False Oath or Account) Felony


(1) The existence of a bankruptcy proceeding;
(2) A statement under oath;
(3) The statement must be material;
(4) The statement must be false; and
(5) The statement was made knowingly and fraudulently.

Title 18 USC Section 152(3) (False Declarations) Felony


(1) The existence of a bankruptcy proceeding;
(2) The defendant made a false declaration, certificate, verification, or other statement in relation to the bankruptcy proceeding;
(3) The statement was material; and
(4) The statement was known to be false.

Title 18 USC Section 152(4) (False Claims) Felony


(1) That bankruptcy proceedings had been commenced;
(2) That defendant presented or caused to be presented a proof of claim in the bankruptcy;
(3) That the proof of claim was false as to a material matter; and
(4) That the defendant knew the proof of claim was false and acted knowingly and fraudulently.

Title 18 USC Section 152(5) (Fraudulent Receipt of Property) Felony


(1) The defendant receives a material amount of property from a debtor;
(2) Such transfer occurred after the filing of a case under Title 11; and
(3) The acts were done with the intent to defeat the provisions of Title 11.

Title 18 USC Section 152(6) (Extortion and Bribery) Felony


(1) The defendant gives, offers, receives, or attempts to obtain money or property, remuneration, compensation, reward, advantage, or promise for acting or forbearing to act in any case under Title 11; and
(2) The action was made knowingly and fraudulently.

Title 18 USC Section 152(7) Fraudulent Transfer or Concealment) Felony


(1) The defendant fraudulently transferred or concealed the defendant's property or the property of another; and
(2) Such act of transfer or concealment was done with the intent to defeat the provisions of Title 11, or in contemplation of a case under Title 11.

Title 18 USC Section152(8) (Destruction or Alteration of Recorded Information) Felony


(1) A bankruptcy proceeded existed;
(2) The defendant concealed, destroyed, or mutilated the documents;
(3) Such documents related to the property or financial affairs of the debtor; and
(4) The defendant acted knowingly and fraudulently.

Title 18 USC Section 152(9) (Withholding of Recorded Information) Felony


(1) That a bankruptcy proceeding existed;
(2) That the defendant withheld from the trustee entitled to its possession, books, documents, records, or papers;
(3) That such documents related to the property or financial affairs of the debtor; and
(4) That the defendant withheld the documents knowingly and fraudulently.

Title 18 USC Section157 (Bankruptcy Fraud) Felony


(1) Defendant devised or intended to devise a scheme or artifice to defraud; and
(2) For the purpose of executing or concealing such scheme or artifice or attempting to do so;
(3) Files a petition under Title 11; or
(4) Files a document in a proceeding under Title 11; or
(5) Makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under Title 11.

Title 18 USC Section 286 (Conspiracy to Defraud the Government with Respect to Claims) Felony


(1) An agreement, combination, or conspiracy to defraud the United States
(2) By obtaining or aiding to obtain the payment of any false, fictitious or fraudulent claim.

Title 18 USC Section 287 (False Fictitious or Fraudulent Claims) Felony


Knowingly makes or presents (statute does not require that person providing false information to return discounter* who filed return actually file return to be guilty under 287)
a false, fictitious or fraudulent claim
knowing that claim filed is false, fictitious or fraudulent. *Files return for T/P for percentage of refund.

Title 18 USC Section 371 (Conspiracy) Felony


(1) The general conspiracy statute encompasses two distinct types of conspiracies
A conspiracy to commit any federal offense
A conspiracy to defraud the United States or any agency thereof, which includes the Service
(2) the essential elements of a Section 371 offense are:
a. An
agreement by two or more parties
b. To
commit an offense against the United States; or, to defraud the United States or one of its agencies
c. An
overt act by one or more of the parties in furtherance of the agreement
requisite intent to defraud or to commit the substantive offense

Title 18 USC Section 1001 (False Statements) Felony


(1) Either:
Falsifying, concealing or covering up any material fact by any trick, scheme, or device; or
b. Making false, fictitious or fraudulent statements
or representations; or
c. Making or using any false writing or document.

(2) Knowingly and willfully.
(3) In a matter within the jurisdiction of a department or agency of the United States.
(4) The false matter was of a material nature.

Title 18 USC 1956 (Laundering of Monetary Instruments) Felony


Whoever knowing that property involved is proceeds from a specified unlawful activity (SUA) (person knew that proceeds was from some activity that constitutes a felony under state, federal or international law)
Conducts or attempts to conduct a financial activity involving proceeds of a SUA
(1) With intent to promote the SUA or
(2) With intent to engage in conduct in violation of 7201 or 7206 or Whoever knowing the transaction is
(1) Designed to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of the SUA or
(2) To avoid a transaction reporting requirement under a State or Federal law.


25.1.2  Recognizing and Developing Fraud  (01-01-2003)

1.       This section discusses the fact that a fraud case begins with the compliance employee's recognition of affirmative indications and acts of fraud by the taxpayer. Further development of these " indicators" (a sign or symptom, for example, an unexplained increase in net worth) assists the employee in establishing the firm indications (affirmative acts) necessary for a successful fraud case.

2.       When initial indications (signs or symptoms) of fraud are uncovered, the compliance employee should initiate a discussion with his/her group manager and the FRS . Service Center Examination employees should refer to their designated Fraud Coordinator who will act as liaison to the FRS . A plan of action should be developed jointly as early as possible to document firm indications (affirmative acts) of fraud. An integral part of the plan is establishing that sufficient affirmative acts exist to confirm fraud. The plan should be a joint effort of the compliance employee, manager and the FRS .

3.       The compliance employee, with assistance of the FRS , must know when to suspend action on the case and prepare a criminal referral. If the compliance employee stops too soon all the information necessary to document firm indications (affirmative acts) of fraud may not be developed sufficiently for CI.

4.       The minimum plan of development should include following up on all leads indicated as fraud indicators (signs or symptoms), securing copies of all relevant data relating to indicators of fraud (signs or symptoms) and noting from whom and when obtained. Documents obtained from the taxpayer or other third parties should not be annotated with any comments by the compliance employee. It is critical for the employee to secure the taxpayer’s explanations for any discrepancies.

5.       An understatement of the tax liability alone is not fraud. In order to sustain the civil fraud penalty or make a criminal referral, the compliance employee must establish the intent was to defraud.

6.       For area compliance employees, when it is agreed by the examiner, group manager and FRS that potential for fraud exists, the case will be updated to Status Code 17 (Fraud Development Status). This decision is an important event in the examination and should be documented in the case file. Form 11661, Fraud Development Status, may be utilized to document FRS involvement as well as the decision to update the case to Status Code 17. While in Status Code 17 (Fraud Development Status) and Status Code 18 (Accepted by CI), cycle time will be excluded from monthly "aging" reports to management (Month At a Glance Report). AIMS and ERCS data, however, will include all cases. In order to reconcile to the Month At a Glance Report, Status 17 and 18 cases must be excluded from the overage category and the overage percentage manually computed. Cases should be returned to Status Code 12 if it is later determined that fraud potential no longer exists. Service Center Examination employees will coordinate potential fraud case development and preparation of Form 11661 with their manager, designated Fraud Coordinator and the FRS . At this writing, Status 17 is not valid for potential fraud cases at the service centers.

7.       When it is agreed by the revenue officer, group manager and FRS that potential for fraud exists, the case will be updated to ICS sub code 910. Form 11661 may be utilized to document this decision and input of ICS sub code 910. ICS sub code 910 will remain on the case either until the group manager and FRS concur the case no longer has fraud potential or CI declines referral of the case.

8.       The compliance employee or group manager should not obtain advice and/or direction from CI for a specific case under examination. The FRS is available for consultation.  (01-01-2003)
Indicators of Fraud

1.       Listed below are examples of fraud indicators. The following lists are not all-inclusive and are only indicative of the types of actions taxpayers may take to deceive or defraud.

2.       Indicators of Fraud—Income

A.      Omissions of specific items where similar items are included.

B.      Omissions of entire sources of income.

C.      Unexplained failure to report substantial amounts of income determined to have been received.

D.      Substantial unexplained increases in net worth, especially over a period of years.

E.      Substantial excess of personal expenditures over available resources.

F.      Bank deposits from unexplained sources substantially exceeding reported income.

G.     Concealment of bank accounts, brokerage accounts, and other property.

H.      Inadequate explanation for dealing in large sums of currency, or the unexplained expenditure of currency.

I.         Consistent concealment of unexplained currency, especially in a business not calling for large amounts of cash.

J.       Failure to deposit receipts to business account, contrary to normal practices.

K.      Failure to file a return, especially for a period of several years although substantial amounts of taxable income were received.

L.       Cashing checks representing income at check cashing services and banks other than the taxpayer's.

M.     Covering up sources of receipts by false description of source of disclosed income, and/or nontaxable receipts.

3.       Indicators of Fraud—Expenses or Deductions

A.      Substantial overstatement of deductions.

B.      Substantial amounts of personal expenditures deducted as business expenses.

C.      Claiming fictitious deductions.

D.      Dependency exemption claimed for nonexistent, deceased, or self-supporting persons.

E.      Loans of trust funds disguised as purchases or deductions.

4.       Indicators of Fraud—Books and Records

A.      Keeping two sets of books or no books.

B.      False entries or alterations made on the books and records, backdated or post dated documents, false invoices, false applications, statements, other false documents, or applications.

C.      Invoices are irregularly numbered, unnumbered or altered.

D.      Checks made payable to third parties are endorsed back to the taxpayer. Checks made payable to vendors and other business payees are cashed by the taxpayer.

E.      Failure to keep adequate records, concealment of records, or refusal to make certain records available.

F.      Variances between treatment of questionable items on the return as compared with books.

G.     Intentional under or over footing of columns in journal or ledger.

H.      Amounts on return not in agreement with amounts in books.

I.         Amounts posted to ledger accounts not in agreement with source books or records.

J.       Journalizing of questionable items out of correct account.

K.      Recording income items in suspense or asset accounts.

L.       False receipts to donors by exempt organizations.

5.       Indicators of Fraud—Allocations of Income

A.      Distribution of profits to fictitious partners.

B.      Inclusion of income or deductions in the return of a related taxpayer, when difference in tax rates is a factor.

6.       Indicators of Fraud—Conduct of Taxpayer

A.      False statement about a material fact involved in the examination.

B.      Attempts to hinder the examination. For example, failure to answer pertinent questions, repeated cancellations of appointments, refusal to provide records, threatening potential witnesses, including the examiner or assaulting the examiner.

C.      Failure to follow the advice of accountant or attorney.

D.      Failure to make full disclosure of relevant facts to the accountant.

E.      The taxpayer’s knowledge of taxes and business practices where numerous questionable items appear on the returns.

F.      Testimony of employees concerning irregular business practices by the taxpayer.

G.     Destruction of books and records, especially if just after examination was started.

H.      Transfer of assets for purposes of concealment, or diversion of funds and/or assets by officials or trustees.

I.         Patterns of consistent failure over several years to report income fully.

J.       Proof that the return was incorrect to such an extent and in respect to items of such character and magnitude as to compel the conclusion that the falsity was known and deliberate.

K.      Payment of improper expenses by or for officials or trustees.

L.       Willful and intentional failure to execute pension plan amendments

M.     Backdating of applications and related documents.

N.      Making false statements on TEGE determination letter applications.

O.     Use of false social security numbers.

P.      Submission of false Form W–4.

Q.     Submitting a false affidavit.

R.      Attempts to bribe the examiner.

7.       Indicators of Fraud—Methods of Concealment

A.      Inadequacy of consideration.

B.      Insolvency of transferor.

C.      Assets placed in other's names.

D.      Transfer of all or nearly all of debtors’ property.

E.      Close relationship between parties to the transfer.

F.      Transfer made in anticipation of a tax assessment or while the investigation of a deficiency is pending.

G.     Reservation of any interest in the property transferred.

H.      Transaction not in the usual course of business.

I.         Retention of possession.

J.       Transactions surrounded by secrecy.

K.      False entries in books of transferor or transferee.

L.       Unusual disposition of the consideration received for the property.

M.     Use of secret bank accounts for income.

N.      Deposits into bank accounts under nominee names.

O.     Conduct of business transactions in false names.  (01-01-2003)
Investigative Techniques

1.       Most fraud cases involve individual and business taxpayers with poor or nonexistent internal controls. Those cases where there is no separation of duties have a greater potential for material misstatement of taxable income than individuals with salary and wages. However, fraud can be and is present in all types of returns.

2.       Unusual, inconsistent or incongruous items should alert examiners to the possibility of fraud and the need for further investigation. Taxpayer misconduct should be an early warning sign of possible fraudulent conduct. The method of operating a business (i.e., lack of internal controls, dealing in cash, etc.) may be indicative of improperly filed returns.

3.       The initial contact provides the opportunity to obtain valuable information which may not be readily available later. Indications of fraud may be disclosed in discussions, financial activities and nonresponsive answers. Questions asked should be recorded verbatim. Nonresponsive answers should be noted and judgment used in deciding what information is relevant (affidavits may be used). Workpapers should be noted as to the tax year, the date of the contact, who was present during the contact and the maker of the workpapers. Workpapers should include such information as:

·         Who prepared the information used on the tax return

·         Who approves and classifies expense items

·         Who deposits business receipts

·         How business gross receipts per the tax return are determined

4.       The compliance employee should prepare a memorandum of interview summarizing information obtained and statements made. This will become part of the workpapers to aid in the fraud development.

5.       Throughout the investigation, it is important to keep a current and accurate historical record of all contacts and conversations with the taxpayer. This is necessary to track statements, when records were received and from whom and steps taken to determine the correctness of the information volunteered. Annotations should not be made on records and other evidence received. It is important that the chain of custody of evidence obtained be clearly established through the historical record. Although necessary in any investigation, this area can be critical in sustaining fraud.

6.       Fraud will not ordinarily be discovered when compliance employees readily accept the completeness and accuracy of the records presented and the explanation offered by the taxpayer. It is necessary to go behind the books and to probe beneath the surface. The judgment of the employee will determine the techniques used. The investigation should be extended to the point where the employee is satisfied and the results are substantially correct.  (01-01-2003)
Aiding and Abetting

1.       It is important to determine who is responsible for the fraudulent act(s). If the taxpayer isn’t responsible then neither criminal and/or civil fraud are applicable. If the preparer is culpable then preparer penalties should be considered. See IRM 20.1.6.

2.       If a questionable preparer is discovered, contact the Return Preparer Coordinator in your Area PSP. Also see chapter 3.3 in this IRM for additional guidance.

3.       There are also civil and criminal penalties for anyone who aids and abets an understatement of tax liability under IRC Sections 6701 and 7206(2). The individual must be directly involved in the preparation or presentation of the false or fraudulent document. This may include independent contractors such as lawyers, accountants and appraisers who counsel on a course of action. It is possible for criminal referrals and/or civil penalties to apply to both the taxpayer and the person assisting the taxpayer.  (01-01-2003)
Bankruptcy Fraud

1.       CI field offices are now authorized to utilize bankruptcy fraud statutes 18 USC 152 and 157 in the prosecution of bankruptcy related tax fraud investigations. Investigations involving allegations of bankruptcy fraud are appropriate when the IRS is a major creditor and tax crimes are suspected. Statute jurisdiction has been extended to bankruptcy fraud violations to increase tax compliance and facilitate bankruptcy related fraud referrals.

2.       The purpose of this section is to alert compliance employees to the tax consequences that may result in a "bust out" or scam. The individual perpetrating bankruptcy fraud may be converting merchandise inventory, cash or other assets to personal use and for personal gain. For an in-depth discussion of bankruptcy fraud, compliance employees should refer to Document 9762, revision 9–96, "Desk Guide for Bankruptcy Tax Crime Referrals."

3.       Compliance employees should become familiar with the methods used in perpetrating bankruptcy fraud and to recognize these illegal acts.

4.       One type of bankruptcy fraud involves the concealment of the transfer of ownership of a business which is acquired either legally or illegally. The creditors, not knowing of the change in ownership, permit the new owners to operate on the former proprietor’s credit rating. After acquiring a business, frequently a number of large bank deposits are made to establish a more favorable credit rating. Then large amounts of merchandise are purchased from a number of suppliers. First, purchases are made for cash, then on fifteen day credit, then on thirty day credit and finally on whatever the creditors will bear. Favoring merchandise that is troublesome to trace, easy to transport and simple to market, such as appliances, furniture and office equipment, payment for all goods is made regularly and on time. The orders are steadily increased but payments eventually decline as to the percentage of what is due. Then, usually just before a busy season or on some specific event, huge orders are placed. When the goods arrive, the " bust out" occurs. The merchandise is sold for cash, sometimes at less than wholesale prices, to organized crime figures or to other business people who are willing to buy at cut-rate prices with little or no questions asked. The creditors are left with substantial claims and a bankrupt business with no assets.

5.       Another scheme is to give the " selected" company a name almost identical to that of a well known and highly creditworthy corporation. The address given may even be on the same street as the reputable concern. Capitalizing on the favorable credit rating of the well known firm, the "selected company" proceeds to order goods from misled suppliers. In this case, the "bust out" can proceed faster because there is a pre-established credit rating and financial statements are often unnecessary.

6.       Some red flags that signal that a bust out scheme might be in process include:

·         A business relationship based principally on trust. Creditors are willing to offer extended payment, hold checks, or take postdated checks. This makes them vulnerable.

·         Buyers with a history of purchasing goods for an unreasonable discount.

·         A large number of bank accounts, indicating a possible kiting scheme. The perpetrator occasionally pays some of his creditors with funds generated by floating checks between bank accounts (used by permission of the Association of Certified Fraud Examiners).

7.       A third form of planned bankruptcy is similar to the first one listed above. In this case, however, orders are placed for merchandise unrelated to the regular line of business, such as a furniture store ordering jewelry as door prizes, usually during the supplier’s busy season. Sometimes rush orders are made during the supplier’s slack season, in the hope that creditors will omit a credit check in their haste to cash in on rush or off season business.

8.       Still another scheme exists whereby an individual acquires a profitable business by surreptitiously acquiring control of the outstanding stock of a corporation. Once in control of the stock, he/she quickly moves in and takes control of the business. All assets of the corporation are then quickly sold for whatever price they will bring leaving the remaining shareholders with a bankrupt corporation.

9.       The compliance employee should also be alert to the purchases of merchandise inventory and other assets for cash near or below the supplier’s cost because of the potential for a "skimming " case. A "skimming" case is one in which the individual or corporation skims off the top by understating sales or revenues. They then correspondingly understate purchases and cost of sales to keep the markup percentage in line with the understated sales or revenues.

10.   Bankruptcy fraud is very subtle. It may be evidenced when examining the accounts receivable and bad debt accounts of a suspected "scam" victim. These telltale signs may take the form of one or more of the following.

A.                  A purchaser comes under new management and the change of ownership is not publicly announced and the identity of the new owner is obscure.

B.                  A customer orders goods unrelated to his usual line.

C.                  Order quantities increase markedly in contradiction to the seasonal nature of the customer’s business.

D.                  Financial statements of customers are unaudited and unverified.

E.                  Remittances from an account lag, customers’ accounts receivable balance climbs, and/or notes or postdated checks are remitted.

F.                  Trade references cannot be verified.

G.                 Customer’s name and/or address is similar to that of some other firm.

H.                  Rush orders are frequently placed.

I.                     Discovery of known racketeers or those with criminal records being installed in positions of importance in a company being serviced.

11.   In the examination of bankrupt companies which have been a part of a scam conspiracy, the officers or principals are generally vague about their plight and are unable or unwilling to furnish details of what transpired. Books and records are generally inadequate or have disappeared. The bankrupt taxpayer’s payroll and expense accounts may be unusually generous. Finally, the remaining assets are usually nominal and include the oldest and least salable kind.  (01-01-2003)
Employment Tax Fraud

1.       The package audit policy described in Policy Statement P–4–4, IRM ( IRM 1.2.1, Policies of the Internal Revenue Service) particularly relates to the examination of employment tax liabilities. Frequently taxpayers fail to treat as employees persons they generally designate as "self-employed or casual labor." There may also be willful attempts to camouflage salary payments or to list as wages, payments where no services have been performed. The most common employment tax fraud, however, is simply not remitting trust fund taxes to the Government. Multiple schemes have been concocted to evade employment tax. The following paragraphs describe the major identified schemes. Also, please see IRM for a discussion of various employment tax schemes.

2.       Pyramiding liabilities occur where the subject withholds the tax but does not pay it over. After several quarters, the subject moves the assets to a new corporation and abandons the old business activity. The subject continues the withholding but does not pay the tax over, and again abandons the second company when financial problems occur, and forms a new company. When this is accompanied by bankruptcy of the predecessor companies, further complications arise.

3.       Employee leasing companies are a growing area of fraud. This is an industry where an employee leasing company contracts with a client company to handle the client company's administrative duties and hire some or all of the client company's employees, leasing back these employees to the client company. When the leasing company does not pay the employment taxes due on the employees it leases, huge tax deficiencies can occur in a short span of time because the leasing company can be responsible for several client companies. Generally, the employee leasing company will not have any significant assets to collect against, as it is only a service company. When there is indicia of fraud indicating that an employee leasing company was established to fraudulently evade federal employment taxes, consideration should be given to referring the case for CI consideration.

4.       A scheme commonly referred to as the 861 refund scheme, uses Forms 941C, or some other claim for refund, to request a refund of all employment taxes paid. The promoters of these schemes also advise employers to opt out of the income tax system and stop withholding taxes and filing employment tax returns.  (01-01-2003)
Payroll Padding

1.       Payrolls may be padded for numerous reasons. The purpose is usually the same: to get funds out of a business in the form of a deduction without the recipient paying income tax on the income. This method is commonly used where the paying enterprise is in the type of business which does not sell for cash and money can only be taken out by check. This method could be used as a tax evasion scheme enabling the taxpayer to obtain funds needed for extortion, to pay for personal expenses or to repay gambling losses or debts to loan sharks.

2.       Another way to pad the payroll is to have political party workers on the payroll even though the employee performs no services for the payor company.

3.       To detect indications of payroll padding, focus special attention on payroll records:

A.      If there is a suspicion or knowledge that fictitious employees are being used, then the negotiation of the check should be pursued. If checks are cashed at the same bank or through other parties, the payee may be known at the bank or by the reendorsers.

B.      If Forms W–2 are returned by the Post Office as undeliverable, all payroll checks to such employees should be thoroughly scrutinized as to their disposition and the route they took back to the bank.

C.      Social Security numbers on W–2’s should be verified for legitimacy. Because each employee is required to have a Social Security number, a listing of duplicate numbers might reveal ghost employees (used by permission of the Association of Certified Fraud Examiners).

D.      An analysis of payroll withholdings might reveal either ghost employees or trust account abuses. Ghost employees often will have no withholding taxes, insurance or other normal deductions. Therefore, a listing of any employee without these items might reveal a ghost employee (used by permission of the Association of Certified Fraud Examiners).

E.      If the company provides or assists in insurance coverage, pension plans, etc., test employee terminations to determine whether the employee was also withdrawn from the payroll.

F.      A company may continue issuing checks to an employee who has left. Randomly select employees and compare endorsements at various times during the year.

G.     Key employees or officers may be loaned to political parties to perform various services while being paid their salary by their employer. Attempts should be made to determine where the employees’ services were performed during the payroll periods in question. Examination of expense reimbursement reports would be of assistance in determining the geographical location of the employee at a particular time. This information may serve as a basis for a follow-up interview of the employee.

4.       Some prominent figures in organized crime have no legitimate source of income. They receive income only through illegal activities. Therefore, in order to prove how they support themselves and their family, they must have a source of legitimate income to report for income tax purposes. These individuals will find a business willing to put them on the payroll and issue them regular payroll checks, even though the employee performs no services. The employer is frequently a retail outlet owned by or associated with some other member of organized crime. In most cases these payroll payments are returned to the payer in cash and diverted.

5.       Extend the examination to the suspected prominent figure and trace the disposition of their payroll checks to determine if any of the money was returned to the corporation.

6.       When the entity being examined is suspected of being used as a salary haven by a prominent figure in organized crime, the examining agent should look for certain indications to support the suspicion.

A.      Determine if checks are cashed by the employer.

B.      Establish whether the employee has the qualifications to perform the function for which he/she receives the salary.

C.      If records indicate the employee is still on the payroll at the time of examination, the compliance employee should attempt to establish whether they are actually present on the premises.

D.      If the employee holds a position as outside salesman, the compliance employee should determine who the customers are and establish whether the employee actually contacts these customers.  (01-01-2003)
Excise Tax Fraud

1.       In addition to other indications of fraud, the following incidents should be considered in excise cases:

A.      Taxpayer previously filed returns and paid excise tax but stopped filing and paying without explanation.

B.      Taxpayer sold the article at a tax included price but did not report or pay tax to government.

C.      Taxpayer handles identical products, considers one taxable and the other not taxable.

2.       In collected taxes cases warranting assertion of the Trust Fund Recovery Penalty, there will be instances when any appreciable delay in asserting and collecting the tax or penalty would jeopardize the revenue. In all such cases, the area director is authorized to decide whether collection of the penalty might be jeopardized. If in the area director’s opinion the revenue might be jeopardized by following such procedure, the director may disregard it and promptly assess and collect the penalty involved, making necessary quick assessments or jeopardy assessments, as circumstances warrant. Except for potential jeopardy cases, the Service does not authorize assessment of additional penalties during the time a recommendation for criminal prosecution is under consideration or during the period such cases may be awaiting trial or pending an appeal.  (01-01-2003)
Excise Taxes—Willful Failure to Pay

1.       IRC Section 4103 provides that in cases of willful failure to pay gasoline, diesel, or aviation fuel taxes under IRC Sections 4041(a)(1), 4081 or 4091, each person: (1) who is an officer, or agent of the taxpayer and is under a duty to ensure that the tax is paid and who willfully fails to perform this duty, or, (2) who willfully causes the taxpayer to fail to pay the tax, is jointly and severally liable with the taxpayer for the tax. Section 4103 applies to nonpayment of taxes for periods ending after November 30, 1990 .

2.       The assessment statute for Section 4103 is identical to the limitations period for the Section 4041(a)(1), 4081 or 4091 taxpayer, i.e., three years from the actual Form 720 filing date (not the presumptive date). If no return was filed or if a fraudulent return with intent to evade the tax was filed, there is no assessment statute.  (01-01-2003)
Section 4103 cases—Referrals to Collection Function

1.       Determine willfulness and duty to ensure tax is paid and failure to perform such duty, or willfulness and the causation of the taxpayer's failure to pay tax, as appropriate, on the part of the person(s) involved.

2.       Prepare a memorandum to the Technical Support function. The subject line will state "Referral of Potential Section 4103 Case." The memorandum will be forwarded through the field territory manager and will contain the following information:

·         Examiner’s name and telephone number.

·         Taxpayer’s name, taxpayer’s identification number ( TIN ), and current address.

·         Tax period(s), statute date(s), abstract number(s) and deficiencies involved.

·         Names, titles, TIN ’s and current addresses of all persons who appear responsible for ensuring payment of the tax.

·         The examiners best estimate of the projected disposition of the case.

·         An explanation of the proposed adjustments and the facts supporting the examiner’s determination.

3.       Appropriate remarks will be included in the workpapers with a copy of the completed referral memorandum in the case file. In cases where Section 4103 does not apply, examiners will comment in the workpapers that a referral was considered but not made and include the reasons.

4.       When Technical Support receives a referral from the examination function, the collection function will make the final determination in assessing the personal liability for excise tax under section 4103.

25.1.3  Criminal Referrals  (01-01-2003)

1.       This section discusses criminal referrals and prosecutions. Criminal prosecutions serve to enhance voluntary compliance. The identification of potential criminal cases by compliance employees is an important part of this process. When firm indications of fraud exist and criminal criteria are met, the compliance employee should prepare Form 2797, Referral Report of Potential Criminal Fraud Cases. The fraud referral specialist ( FRS ) is available to assist (determine if firm indications of fraud are present, criminal criteria has been met, etc.).  (01-01-2003)

1.       The primary objective of CI is the prosecution, conviction and incarceration of individuals who violate criminal tax laws and related offenses. The Federal Sentencing Guidelines tie the period of incarceration to the monetary value of the violation, and consequently, the amount of the "tax loss " (see 2 below) must usually be higher than the minimum LEM criteria for a sentence of incarceration to be imposed. Tax loss is commonly referred to as "criminal criteria." United States Attorneys are reluctant to use their resources to prosecute individuals who cannot be sent to prison. When evaluating a criminal fraud referral, it is essential to determine if the individual is likely to be incarcerated if convicted.

2.       "Tax loss" as defined for individual taxpayers in the Federal Sentencing Guidelines, may encompass amounts greater than the criminal tax computation in the Special Agent’s Report. It may include amounts from years outside of the prosecution period, it may also include state tax loss, depending upon the determination of the taxpayer’s "relevant conduct" as it relates to those amounts. Tax loss is computed using all of the years for which a preponderance of the evidence shows that the understatements or tax due is attributed to fraud. The criminal tax computation differs from the civil tax computation, as it includes only those adjustments due to the criminal conduct of the taxpayer.  (01-01-2003)
Preparation of Form 2797

1.       If after consultation with the fraud referral specialist ( FRS ), it is determined a potential fraud case has firm indications (affirmative acts) of fraud and meets criminal criteria, the compliance employee will suspend the examination or collection efforts without disclosing to the taxpayer or representative the reason for the suspension. A referral to CI will be prepared using Form 2797.

2.       The referral will be a detailed factual presentation of those factors used to establish firm indications of fraud, including, but not limited to:

·         Affirmative act(s) of fraud

·         Taxpayer’s explanation of the affirmative act(s)

·         Estimated criminal tax liability

·         Method of proof used for income verification

3.       No workpapers or attachments are required with the referral. The initial conference allows the compliance employee the opportunity to explain the case in detail and address any questions regarding the potential criminal violations. Cl will be provided access to all workpapers and documents needed to effectively evaluate the referral during the initial meeting.

4.       Form 2797 should be prepared for the principal individual or legal entity involved in the fraud. Only one Form 2797 is prepared despite having multiple entities involved, i.e., individual, corporate, partnership, employment tax, etc. Only one Form 2797 is prepared for a husband and wife who filed a joint return. A separate Form 2797 is no longer prepared for each type of tax involved. Related entities should be identified and discussed in the body of the referral. Related returns will be associated with the referral if they are false as to a material item.

5.       Only one Form 2797 is prepared covering an allegation of failure to comply with a notice issued as provided in IRC 7512, even though withheld income, social security tax, or collected excise taxes may be involved.

6.       Form 2797 is prepared in triplicate, and must be approved by the compliance employee's group manager. One copy of the report is to be retained with the case file. The original and one copy are forwarded to the FRS for concurrence. Form 2797 will be prepared in quadruplicate for referrals of return preparers, see IRM

7.       The FRS will review Form 2797 to ensure the quality of the referral. The FRS will forward the original and two copies of reviewed Forms 2797 via Form 3210, Document Transmittal to their group manager ( FRS G/M) for review and approval and retain a copy for his/her referral pending file.

8.       The FRS G/M will forward via Form 3210, Document Transmittal, the approved Form 2797 containing the criminal referral to the appropriate CI Lead Development Center (LDC). A copy of Form 3210 transmitting each approved fraud referral to the LDC will be provided to the FRS . The LDC will make the initial determination if the referral is fully developed, meets CI’s criminal criteria and is in concert with CI’s workplan (Strategic Performance Plan ( SPP ) and Annual Compliance Guidance ACG). If so, the referral will be forwarded to the appropriate field office for evaluation.  (01-01-2003)
Referral Evaluation

1.       Within 10 workdays of the receipt of the referral by the evaluating field office from the LDC, an initial conference will be arranged by the evaluating field office. At the initial conference the referring compliance employee, his/her group manager, the evaluating CI special agent, his/her supervisory special agent and the FRS , if available, will meet to discuss the referral, review tax returns, evidence, etc. Within 30 workdays of receipt of the referral by the evaluating field from the LDC, the same parties will meet again at a disposition conference to discuss CI’s decisions to accept or decline the referral. CI will provide feedback to the referring compliance employees and the FRS as to their decision. Area Counsel will be invited to offer legal advice, if deemed necessary.

2.       The final decision as to whether the referral meets or does not meet the criminal criteria should be made no later than the 30 workday disposition conference. Any further extensions must be granted by written agreement of the appropriate field territory managers. The agreement should specify the reason for the request (such as a delay in receiving signed tax returns or an opinion from Counsel) and the date the referring office may expect a final determination.

3.       The FRS will monitor the conference dates to ensure that all dates and response schedules are followed.

4.       The following information should be discussed no later than the initial conference:

A.      Verification of income and/or criminal tax computations;

B.      Explanations offered concerning the alleged offense;

C.      Whether returns were solicited, any attempts made at civil settlement, or prior actions similar to the alleged offense condoned by the IRS ;

D.      Observations about the age, health (physical and mental), and education of the taxpayer.

5.       Additional factors considered during the evaluation of the referral include additional tax due to fraud, flagrancy, significance, public interest and possible deterrent effect.  (01-01-2003)
Accepted Criminal Referrals

1.       If CI evaluates the referral as meeting the criminal criteria and no obvious barriers to prosecution exist, the existing primary investigation will be numbered as a subject investigation and assigned to a special agent.

2.       Cl will complete the original Form 2797 and return it to the referring group manager with a copy to the FRS . Area compliance employees will then update the case to Status Code 18. Cl will initiate the input of TC 914 controls in the Master File. When the TC 914 is posted to the module on collection function cases, the file may be forwarded to the closed file, if no further action is required (see IRM

3.       The special agent assigned the referral that has been elevated to a subject investigation will promptly meet with the referring compliance employee and determine whether a detailed memorandum is required concerning contacts with the taxpayer, the taxpayer’s representative, or the preparer of the taxpayer’s return. If a memorandum is needed, the following areas should be included:

A.      The date of each contact the compliance employee had with the taxpayer, the taxpayer’s representative, or the preparer of the taxpayer’s return; and

B.      A summary of what took place during each of those contacts, any explanations offered concerning the alleged offense, and/or any action that could be construed as solicitation, condonation, or an attempt at civil settlement.

4.       Within 30 calendar days of numbering the referral as a subject investigation, CI will, if necessary, request a cooperating compliance employee from the referring territory.

5.       IRM 25.1.4 provides specific guidance to compliance employees assigned to a joint investigation case as a cooperating examiner/officer.  (01-01-2003)
Declined Criminal Referrals

1.       If CI evaluates the referral as not meeting the criminal criteria or if there is an obvious barrier to prosecution, the referral will be declined. If the declination determination is made at the LDC, the LDC manager will prepare a declination memorandum explaining the reason(s) the referral is being declined. The declination memorandum will be directed to the FRS manager and will be transmitted to that manager along with the original Form 2797. If the declination determination is made at the evaluating field office level, the Special Agent in Charge (SAC) will send a declination memorandum explaining the reason(s) the referral is not being accepted. The SAC declination memorandum will be directed to the FRS manager and will be transmitted to that manager along with the original Form 2797. A copy of the SAC declination memorandum will be provided to the LDC manager.

2.       If there is a disagreement between CI and the referring operating division (OD) as to whether the referral should be accepted or declined, the area director and the CI Director of Field Operations will intervene to settle the disagreement at their management level.

3.       The compliance employee will continue to be alert for new indications of fraud in declined referrals. If new indications of fraud develop, the case will again be referred to Cl as outlined above.

4.       Groups of cases involving similar examination issues declined by Cl will be afforded special attention. Area Counsel will be consulted in such cases before an agreement is obtained for the deficiency in tax and penalty in any one case. This will permit Area Counsel to advise of the litigation possibilities in the event subsequent cases are unagreed.  (01-01-2003)
Estate & Gift

1.       When initial indications of fraud are uncovered, the Estate and Gift Tax examiner should initiate a discussion with his/her group manager and the fraud referral specialist.

2.       Present procedures call for preparing a report utilizing Form 2797 (Referral Report for Potential Criminal Fraud Cases). This form was designed primarily for income tax cases. It should be adapted as necessary to refer the case. Instructions for the preparation of Form 2797 are contained in IRM

3.       A separate report should be prepared for each principal involved. For example, if there are coexecutors, cotrustees, collusion with heirs, or donees, or split gifts involved, an evasion of tax may result in more than one fraud prosecution.  (01-01-2003)
Return Preparers

1.       All potential criminal referrals regarding preparers should be discussed with the return preparer coordinator and the fraud referral specialist ( FRS ). When revenue agents examine clients of a promoter (a person subject to penalty under 6700 - relating to penalty for promoting abusive tax shelters, etc.) or preparer under criminal investigation, they should assert the appropriate tax and penalties against the clients based on the facts in each case, regardless of whether the clients may testify for the government against the preparer or promoter or become a defendant.

2.       When the group manager concurs a return preparer is involved in fraud, Form 2797 will be prepared as described in IRM, except four copies are made. The original and two copies of Form 2797 will be forwarded to the FRS . One copy will be retained in the preparer case file in the group. The FRS will forward a copy to the compliance return preparer coordinator (RPC) or TEGE returns classifying officer ( RCO ) for appropriate action.

3.       The RPC/ RCO will notify all group managers, in writing, to assure that all civil actions with regard to the subject preparer are suspended. The coordinator should continue to monitor Form 5808 (Return Preparer-Penalty Follow-up) and Form 5809 (Preparer Penalty Case Control Card) files to assure that no new civil penalties are asserted on the subject preparer until the criminal case is resolved.

4.       Form 2797 should be prepared for the principal individual or legal entity involved in the fraud. Only one Form 2797 is prepared despite having multiple entities involved, i.e., individual, corporate, partnership, employment tax, etc. Only one Form 2797 is prepared for a husband and wife who filed a joint return. A separate Form 2797 is no longer prepared for each type of tax involved nor when there are dissimilar fraudulent acts by the same return preparer. Related entities should be identified and discussed in the body of the referral. Related returns will be associated with the referral if they are false as to a material item. Form 2797 should give specific details relating to the apparent fraudulent act(s) including:

·         Name of the taxpayers

·         Taxpayer identification numbers

·         Tax form numbers

·         Amount of the adjustment

·         Resulting deficiencies

5.       The compliance employee should retain a copy of each taxpayer’s report of examination and relevant workpapers so that after disposition of the criminal case, the civil preparer penalty under IRC Section 6694(b) can be pursued.

6.       If Cl declines a referral of a return preparer or an investigation is discontinued, Cl may provide advice and assistance concerning application of IRC 6694(b), willfulness penalty.

25.1.4  Joint Investigation  (01-01-2003)

1.       This section is designed to assist compliance employees involved in joint investigations with Cl.

2.       A joint investigation can originate from one of two sources:

·         Referral Report of Potential Criminal Fraud Cases (Form 2797)

·         Request for a Cooperating Examiner (Form 6544)

3.       There are two types of joint investigations:

·         Administrative (non-grand jury), or

·         Grand jury.

4.       Upon initial involvement in a joint investigation, the assigned examiner should determine the type of joint investigation involved. Joint investigations may be performed using either administrative procedures or grand jury procedures. Please refer to Chapter 5 of this Handbook for a discussion of the differences in joint investigations performed using administrative procedures versus grand jury procedures.  (01-01-2003)
Request for Cooperating Examiner

1.       Cl may request the cooperation of an examiner to assist in a criminal investigation using Form 6544. Upon completion and approval of Form 6544, the CI special agent in charge (SAC) will forward all requests for cooperating agents to the FRS Manager. The FRS Manager will work with the appropriate area/territory manager in having the request assigned. When workload issues are present, the FRS Manager will consult with the local Planning & Special Programs office (PSP) in identifying the appropriate group for assignment.

2.       Form 6544 for accepted cooperating agent requests will be assigned to an appropriate group within 30 days of receipt (or any agreed to extension). The group manager will complete the form and return it to the SAC.

3.       If the assignment of an examiner does not appear to be warranted, a memorandum from the appropriate field territory manager will be submitted to the SAC. If agreement cannot be reached at the territory level, the area director and Director of Field Operations, CI will make the necessary decision. If agreement is still not achieved, the case will be elevated to the next appropriate level.

4.       Cl will retain the original tax returns as evidence and provide copies of returns for all open periods and related entities to the cooperating examiner. This should occur within 30 days of the initiation of a joint investigation or when the original returns are received. The special agent should stamp each copy as a true and correct copy.

5.       The examiner (responsible for all statutes) should request AIMS controls on all years involved in the administrative joint investigation (investigation is not being conducted using grand jury procedures) using push code 049. Project Code 096, Request for Cooperating Examiner, should be used.  (05-19-1999)
Administrative Joint Investigations

1.       This subsection focuses on administrative joint investigations that are not part of a grand jury investigation.  (01-01-2003)
Duties and Responsibilities

1.       The examiner is primarily concerned with determination of the civil tax liability. The special agent is primarily concerned with gathering the evidence to prove criminal violations.

2.       In general, the following tasks are performed by the examiner:

·         Reconciling taxpayer’s books and records to the return

·         Examining books and records to determine adjustments

·         Analyzing bank accounts

·         Verifying inventories

·         Compiling depreciation schedules

·         Ascertaining basis of assets

·         Assisting in interviews of the taxpayer and witnesses

·         Computing civil tax liability for a pre-prosecution report

·         Assisting in the computation of criminal tax liability for the special agent’s report

·         Maintaining a chronological record of time charged to the case

·         Preparing administrative file prior to placing case in fraud suspense.

3.       The criminal aspect is predominant in a joint investigation. To prevent prejudice to the criminal features of such a case, the special agent is responsible for the following:

·         Reading Miranda rights to the taxpayer

·         Obtaining testimony of witnesses

·         Conducting necessary surveillance and undercover work

·         Arrests

·         Executing search warrants and/or seizures of property

·         Developing and documenting evidence of intent

·         Computing the criminal tax liability

·         Preparing and issuing Summons, Form 2039

·         Scheduling and prioritizing investigative actions

4.       The examiner and the special agent should work together with the best interests of the Service in mind with the following considerations:

·         Using non-technical employees to perform voluminous and/or clerical tasks

·         Conserving the cooperating examiner’s time

·         Having the special agent and examiner present at taxpayer interviews

·         Planning the joint investigation so the examiner is utilized for continuous periods of time without interruptions

5.       Group managers should ensure a clear delineation of duties and responsibilities are established in the initial stages of the investigation. Consistent with the CI Manager's Handbook ( IRM 1.4, Resource Guide for Managers), joint quarterly four-ways should be conducted to review the status of the investigation and plan activities to be accomplished by the cooperating examiner/officer and special agent in the next quarter. The CI SSA should initiate contact with the Compliance manager to schedule required quarterly four-ways. Appropriate follow-up should be made periodically to ensure prompt completion of the investigation and proper utilization of resources. During each four-way, the cooperating examiner should review with CI all entities and tax periods currently numbered. AIMS controls will be established for any periods numbered not currently controlled on AIMS.  (05-19-1999)
Jeopardy Assessments

1.       Jeopardy assessments will not be made if such action would imperil successful criminal investigation or prosecution. However, if collection of civil liability in the case is in jeopardy, and a jeopardy assessment is recommended, care should be taken to avoid unnecessary disclosures in the deficiency letter and in any accompanying statement that would imperil successful criminal investigation or prosecution.

2.       Due to the urgency in jeopardy assessments, the file will be given the highest priority of handling between various functions. When fraud is an issue, additional approval will be required from the SAC before the deficiency can be assessed. The fraud referral specialist ( FRS ) will also be consulted regarding the civil fraud penalty on jeopardy assessments.

3.       Recommendations for jeopardy assessments should be made in accordance with IRM 4.15.  (01-01-2003)

1.       In a failure to file case where Master File controls were established using push code 037 prior to the TC 914(Z) freeze being put on the module, a TC 424 record will remain on the module for 26 months or until a return posts. After 26 months, the TC 424 will drop from the system. If the TC 424 drops from AIMS prior to the case being submitted to criminal suspense, the examiner should request Non-Master File controls by submitting Form 5354 (TEGE Non-Master File controls should be requested via Form 5588, TEGE Non-Master File Request). Prior to input of Form 5354, however, the group secretary should contact the local AIMS Coordinator. The local AIMS Coordinator will input TC 421 to reverse the L freeze to enable establishment of non-master file controls.

2.       In a failure to file case where there is no TC 150 or TC 424 record on the module, if CI inputs a TC 914(Z) freeze before Compliance requests controls, the examiner should request Non-Master File controls by submitting Form 5354. The examiner, however, should secure CI's approval prior to establishing the return(s) on AIMS.

3.       In a case where returns are filed and CI has a TC 914(Z) freeze on the module, the examiner should request Master File controls using push code 049. The examiner, however, should secure CI's approval prior to establishing the return(s) on AIMS.

4.       Per IRM (5), the examiner (responsible for all statutes) should request AIMS controls on all years involved in the administrative joint investigation (investigation is not being conducted using grand jury procedures) using push code 049. Project Code 095, Request for Cooperating Officer Based on Examination Referral or Project Code 096, Request for Cooperating Officer not Based on Examination Referral should be used as appropriate.  (01-01-2003)
Parallel Investigations

1.       During a joint investigation involving multiple entities, for example, individual Schedule C, related employment, corporate and partnership returns, the decision may be reached that criminal aspects are not present on all entities.

2.       Consideration should be given to concluding entities civilly after due consideration of any adverse impact on criminal proceedings.

3.       Policy Statement P-4-84, indicates that civil enforcement actions, including collection activity with respect to taxable periods of the same and other types of tax not included in the criminal investigation generally do not imperil successful criminal investigation or subsequent prosecution (see IRM The Policy Statement concludes by indicating civil enforcement actions in these cases should proceed concurrently.

4.       During required quarterly discussions involving the CI SSA, special agent, Compliance manager and revenue agent or revenue officer, the Compliance manager should propose concurrent civil enforcement action consistent with P-4-84. If the issue is still unresolved, the decision should be elevated to the next appropriate management level.  (01-01-2003)
Prior and Subsequent Years

1.       During the joint investigation, the examiner will obtain all prior and subsequent period returns to those included in the joint investigation and will review the return(s) for examination potential.

2.       Examiners must assure that administrative actions on any prior or subsequent year will not imperil successful prosecutions. Compliance must notify CI of any proposed action such as examining or surveying returns, soliciting consents or issuing reports. Notification of CI may be made via Form 10498A, Joint Investigations Intent to Commence Civil Actions (if this form is not available, the examiner will prepare a memorandum requesting approval for proposed civil action).

3.       In cases where CI does not concur, the cooperating agent may utilize Form 10498A (if available) to document CI's dissent to the proposed action. If Form 10498A is not available, the examiner will initiate a memorandum for the signatures of the field territory manager and the SAC with appropriate instructions to withhold civil action, in whole or in part, while the criminal investigation is pending.

4.       If agreement cannot be reached between Compliance and CI, the area director and Director of Field Operations, CI will make the decision consistent with policy statement P-4–84 ( IRM If agreement is still not achieved, the case will be elevated to the operating division commissioner level and Chief, CI for resolution.

5.       If civil action is withheld, the suspended years will be periodically reviewed to protect the government’s interest.  (01-01-2003)
Statute Protection

1.       Examiners are responsible for all civil statutes in administrative joint investigation cases, including prior and subsequent year(s) and related returns.

2.       Examiners must be aware of subsequent filing in failure to file cases to protect the statutes. The examiner should check AIMS periodically to monitor any possible filing.

3.       Examiners should not rely on IRC 6501(c), the fraud statute, to keep the statute open. A consent should be solicited before the three or six-year statute expires (IRC Sections 6501(a) and 6501(e) respectively). All efforts should be made to obtain a consent before the three-year statute expires rather than relying on the six-year statute.

4.       When there are less than 210 days remaining on a statute, the examiner should initiate Form 10498B, Joint Investigations Consent Form Preparation Recommendation (if not available the examiner will prepare a memorandum requesting CI's permission to solicit a consent) and forward to the territory manager for signature. The territory manager will forward Form 10498B to the SAC indicating the intent to solicit a consent to extend the statute. CI will have 10 workdays after receipt of the Form 10498B or memorandum indicating the intent to solicit a consent to extend the statute to accept or decline the request.

5.       If CI approves the request, the consent must be solicited via Letter 907 and Publication 1035. If in person, in the accompaniment of a special agent both Letter 907 and Publication 1035 should be presented to the taxpayer. Per the Statute Handbook ( IRM 25.6), solicitation of the consent should be documented on Form 9984 in the case file that the required notification was made (notification of the taxpayer's rights). A copy of the Letter 907 soliciting the consent should be maintained in the case file. See the Statute Handbook ( IRM 25.6) for procedures to extend the statute. Any subsequent inquiry received from the taxpayer should be referred to the special agent assigned. CI should be informed of the results of the solicitation.

6.       If CI does not approve the request or a consent cannot be obtained, a decision will be made whether to issue a statutory notice of deficiency or allow the statute to expire. See IRM 25.6 of the Statute Handbook for procedures to follow.

7.       Form 10498B (or memorandum if Form 10498B is not available) should be utilized to document the decision to issue a statutory notice of deficiency. After securing the signatures of the territory manager and SAC via Form 10498B, the case will be forwarded to Area Counsel for concurrence in issuing a statutory notice of deficiency. The properly executed Form 10498B should be attached to the appropriate return.

8.       If the decision is made to allow the statute to expire, Form 10498B will document this decision (or a memorandum as referred to above) and will contain the signatures of the territory manager and SAC. The properly executed Form 10498B should be attached to the applicable tax return. The statute should immediately be updated on AIMS using the appropriate alpha code. The Form 895 should also be updated to reflect the correct statute date.

9.       If agreement cannot be reached at the territory level, the area director and Director of Field Operations, CI will make the necessary decision. If agreement is still not achieved, the case will be elevated to the operating division commissioner level and Chief, CI for resolution.  (01-01-2003)
IRC 6501(e), Six-Year Statute

1.       IRC 6501(e) extends the three-year statute of limitations to six years when the taxpayer has omitted in excess of 25% of the gross income disclosed on the return. The six-year statute is a fixed and determinable statute date and must be protected. Fraud need not be proved for IRC 6501(e) to apply.

2.       The burden of proof for the omission of gross income is on the Government. Only income reportable but omitted from the return is included in the computation. Omitted or overstated deductions and expenses are not considered in the computation. Gross income for IRC 6501(e) computation includes the following (not all-inclusive):

A.      Gross income, in the case of a trade or business, means the total amount received or accrued from the sale of goods or services (gross receipts) not reduced by cost of goods sold.

B.      In the case of a partner in a partnership, the gross income for this computation is his/her share of the partnership’s gross income, not the net flow-through. Thus, a copy of the partnership return is required to correctly determine the taxpayer’s share of the partnership’s gross income.

C.      In the case of a shareholder in a S-corporation, the gross income for this computation is his/her share of the S-corporation’s gross income, not the net flow-through or distributed and undistributed taxable income. Thus, a copy of the S-corporation return is required to correctly determine the taxpayer’s share of the S-corporation’s gross income.

D.      Only the net amount of capital gain (sales price less cost basis) on a transaction is included in the computation. Capital losses on transactions aren’t included (they are not netted against capital gains).

E.      In the case of a taxpayer who is deemed to be in the trade or business of selling stock the gross income for this calculation is the gross sales price of the stock (no reduction for cost basis).

F.      The taxable portion of pensions and annuities are gross income.

G.     Be careful when using an indirect method of computing income. Determination of an understatement of adjusted gross income (which includes expenses) is not the same as the IRC 6501(e) computation of gross income.

H.      The six-year statute can be extended on Form 872. Additional language or reference to IRC 6501(e) should not be included on the consent.

I.         All efforts should be made to protect the three-year statute before relying on a secondary statute.

J.       If the Service proves a substantial omission of gross income, a taxpayer's entire tax year is open for adjustment therefore, the Service can determine deficiencies attributable to items other than those items that created the substantial omission. Colestock v. Commissioner, 102 T.C. 380 (1994).  (01-01-2003)
Discontinued Investigation

1.       CI should withdraw from all investigations when it is determined that the case no longer has criminal potential. The SSA will communicate the withdrawal with the cooperating examiner’s group manager.

2.       If the examiner’s group manager objects to the proposed withdrawal, the field territory manager will discuss it with the SAC. If agreement cannot be reached at the territory level, as applicable the area director or director of field operations, LMSB industry director and Director of Field Operations, CI will make the necessary decision.

3.       If Cl withdraws from the joint investigation, the special agent will prepare a discontinued investigation report stating the reason(s) for the withdrawal. A copy of the report and the original tax returns will be forwarded to the field territory manager. The cooperating examiner will continue the civil settlement of the case.  (01-01-2003)
Preparation of the Pre-Prosecution Report

1.       Upon the completion of the joint investigation, the examiner will prepare an unagreed report explaining all civil and criminal adjustments and penalties in detail. The report should be labeled at the top, "Pre-Prosecution Report." Taxpayer’s Position is not necessary.

2.       The civil fraud penalty should be asserted for all applicable years. Accuracy related and/or delinquency penalties should be proposed as an alternative position.

3.       Innocent spouse report writing procedures should be followed when applicable.

4.       The report of civil adjustments should not be provided to Cl until it has been approved by the field territory manager designee.

5.       Upon receipt of the case file, the field territory manager designee will review and approve the pre-prosecution report for technical accuracy. This report will be provided to Cl for use in the Special Agent’s Report.

6.       Form 4665, Report Transmittal, should be attached to the front of the Revenue Agent’s Report. The Report Transmittal should be labeled at the top, "Pre-Prosecution Report," and contain the following information:

·         Background of the case including current status;

·         Summary of statute dates for all years involved;

·         Computation of 25% omission of gross income for all tax years regardless of whether reliance is on the IRC 6501(e), six-year statute.

·         Current power of attorney status;

·         Comments regarding innocent spouse relief under both IRC 6015 and IRC 6663;

·         Recommendations regarding audit potential of subsequent year returns and/or related returns;

·         Information of a confidential nature, including informant information. However, the informant should not be identified by name nor should the report contain information that might reveal the identity of the informant.

·         Information that may be helpful when the case is returned for civil settlement, including potential civil issues not fully developed.  (01-01-2003)
Case File Preparation

1.       The case file should contain sufficient documentation to support the adjustments and penalties in the Revenue Agent’s Report.

2.       Copies of sensitive documents should not be included in the workpapers. The workpapers should make no mention of an informant or specific agencies.

3.       Form 6809, Civil Fraud Penalty Monitoring Form, should be completed and placed in the case file.

4.       Form 3198, Special Handling Notice, should identify the case as a "Fraud Suspense Case."

5.       Form 5348, Examination Update should be prepared updating the case to AIMS Status code 51.

6.       The case file will be forwarded to Tech Support Fraud Suspense until the criminal aspects of the case have been completed.  (05-19-1999)
Civil Settlement of Prosecution Cases

1.       When the criminal prosecution aspects have been completed, CI will prepare a closing memorandum transmitting the administrative file back to field compliance for civil settlement. No civil action may be taken prior to receipt of this memorandum.

2.       The administrative file will be closed from Fraud Suspense and forwarded back to the originating group for civil closing.  (01-01-2003)
Special Conditions of Probation

1.       The Court may order probation for the taxpayer as part of the sentence imposed. The order of probation may contain special conditions relating to the settlement and/or payment of civil tax liability and penalties. The SAC will notify the field territory manager of the special probation requirements.

2.       Cl will update Transaction Code(s) 914 to TC 910. The TC 910 will not be released until the special conditions of probation have been satisfied or the conditions are terminated by the Court.

3.       The field territory manager will inform the SAC of the status of the case by the earliest of the following dates:

A.      When the case is disposed of by the compliance function; or

B.      180 days prior to expiration of the probationary period specified.

4.       The memorandum will include information relative to the taxpayer’s cooperation and should indicate any unwarranted actions.

5.       The SAC will recommend legal action if the taxpayer fails to comply with the conditions of probation.

6.       IRC 6103(h)(4) allows for disclosure of returns and return information to a U.S. probation officer under the following circumstances:

A.      The returns and return information must relate to a taxpayer convicted of a criminal tax violation,

B.      The U.S. Probation Officer must have the responsibility of determining compliance with the tax related conditions of probation,

C.      The returns and return information are limited to those years specified in the conditions of probation, and

D.      The disclosure would not identify a confidential informant or seriously impair a civil or criminal tax investigation.

7.       Any disclosure to a U.S. Probation Officer must be coordinated with the area disclosure officer. 


25.1.5  Grand Jury Investigations  (01-01-2003)

1.       This section discusses grand jury investigations.

2.       By Federal Rules of Criminal Procedure 6(e), information obtained during a grand jury investigation is secret and cannot be disclosed or used in any civil proceeding.

3.       CI may request a grand jury investigation by referring the matter to the Department of Justice Tax Division or the U.S. Attorney may request the assistance of the IRS .  (01-01-2003)
Grand Jury Suspense

1.       When a grand jury investigation has been approved, examiners must suspend all civil actions, terminate the examination and forward the file to grand jury suspense. Technical Support will update the case to AIMS Status Code 36, Grand Jury Suspense.

2.       An unagreed Revenue Agent Report (RAR) should be prepared identifying all known adjustments and applicable penalties. The workpapers should reflect the results of the examination as far as it has progressed and support all adjustments and penalties proposed. All documentation in the case file should reflect the date of receipt or preparation.

3.       Form 4665, Report Transmittal, should be prepared as explained in IRM, except the transmittal should not be labeled "Pre-Prosecution Report."

4.       The examiner should prepare a dated status memorandum establishing a demarcation between facts that existed prior to the grand jury investigation and facts developed as a result of the grand jury investigation. Otherwise, the examiner risks such information being tainted and not admissible for subsequent civil purposes.

5.       After notification of the grand jury investigation, the examiner should not establish AIMS controls for prior or subsequent periods.

6.       Prior to forwarding the case to grand jury suspense, the examiner should ensure all open statutes of limitation are protected and a minimum of 1 year remains on the statute of limitations for each open return.

7.       If the target of grand jury investigation is not currently under examination, AIMS controls should not be established and statute protection is not the responsibility of the cooperating grand jury agent.  (01-01-2003)
Grand Jury Agent Procedures

1.       The grand jury revenue agent is prohibited from gathering information useful only to a civil proceeding. The agent must, however, remain cognizant of the civil ramifications of information received or developed during the grand jury investigation. Such information can be used in a civil case provided the information has been made a matter of public record or was obtained prior to the convening of the grand jury or independent of the grand jury. One of the agent's most important responsibilities is to assist in ensuring this information is made available for the successful civil settlement of the case.

2.       There are generally four critical stages of the agent's involvement with the grand jury investigation and subsequent criminal proceedings during which pertinent civil assessment information (specific taxable income information including the sources of income for each year included in the investigation) may be developed and preserved. During these four stages, the potential exists for securing pre-grand jury information and including grand jury information in the public record. The agent must take action to preserve all usable information for the subsequent civil closure of the case.

a.       Pre-Investigation Stage — Immediately after assignment as the grand jury agent, the revenue agent should identify the records, evidence and other documents secured to-date. Information secured prior to the grand jury should be identified. This information will be free of secrecy restrictions imposed by Rule 6(e) and may be used for civil purposes. Examples of information excluded from the secrecy restrictions include:
• Interviews conducted and documents obtained by CI prior to referral to the grand jury.
• Information obtained by search warrants issued and executed prior to the grand jury.
• Affidavits sworn by the special agent pursuant to securing a search warrant issued by the court. These affidavits reflect alleged offenses.

b.       Indictment Stage — An indictment is the formal written document which identifies the grand jury's charges against the defendant. The indictment is made a matter of public record. The agent in cooperation with the Assistant US Attorney (AUSA) should attempt to have complete civil assessment information included in the indictment. However, depending on the charges alleged in the indictment, the AUSA may or may not be able to include this information in the indictment. If the case does not go to trial, the next opportunity for the agent to ensure civil assessment information is preserved is the plea agreement.

c.       Plea Agreement Stage — Even though the revenue agent usually does not participate in this stage, it is important the agent convey to the AUSA the importance of including specific civil assessment information in the plea agreement. Plea negotiations generally result in agreements with the defendant pleading guilty to lesser charges. This sometimes leads to a problem if there was limited disclosure of specific information in the indictment. The absence of specific civil assessment information in the plea agreement may very well result in the defendant being incarcerated and not paying any tax or penalties due to lack of information in the public record. Discussion of this possible outcome with the AUSA demonstrates the importance of including specific civil assessment information in the plea agreement. If specific civil assessment information has not been made a matter of public record through the indictment or plea agreement, the last opportunity to achieve this objective is during formal sentencing proceedings.

d.       Formal Sentencing Proceedings Stage — There are many statements and documents entered into the public record during this stage. One of the most important documents entered in the public record is the Government's Version of the Facts. This document is often read into the record by the prosecuting attorney. This document usually summarizes what the government would have proven if the case had gone to trial and will also cover years and/or charges to which the defendant did not plead. Since the Sentencing Guidelines require for tax charges that the entire loss to the government be disclosed including years not included in the plea agreement or indictment, the revenue agent should request the AUSA to read this information into the record. This is necessary due to the fact this information is often sealed as part of the probationary report.


Information entered into the record during sentencing proceedings must be relevant to the question of guilt or assist the court in sentencing the defendant. In United States v. Alexander, 860 F. 2nd. 508 (2d. Cir. 1988) copious amounts of grand jury material were introduced by the prosecutor during the sentencing phase of a prosecution. The court ruled sealing of the record was needed after the hearing since the prosecutor had abused his discretion by using the hearing as a pretext for disclosing grand jury materials to other government attorneys as prohibited by Baggot and Sells.

3.       Note:

4.       The grand jury agent should segregate all documents in the case file prepared by the revenue agent assigned to the case prior to identification of the case as a grand jury case (administrative revenue agent). This information should be forwarded to the field territory manager designee for inclusion in grand jury suspense.

5.       The grand jury revenue agent has the responsibility of assembling and forwarding documents and evidence necessary for a civil tax closing of a grand jury investigation. The grand jury agent in preparing to close the case following completion of the grand jury investigation should complete the following actions:

·         If the investigation is discontinued and/or no indictment is returned and nongrand jury information was previously forwarded to the field territory manager designee, the agent will prepare a memorandum informing the designee that the grand jury aspects of case have been concluded and the case should be released for civil settlement.

·         If the investigation was conducted entirely using grand jury procedures and as a result there are no pre-grand jury documents, the agent will prepare a memorandum to the file so stating.

·         Segregate and assemble nongrand jury documents that will be utilized in the civil settlement.

·         Immediately following sentencing of the defendant, a Form 5346, Examination Information Report should be prepared addressing the civil aspects of the case. Form 5346, should include the following information:
a) A narrative summarizing the history of the case and the results of the investigation.
b) An index of documents included in the case file briefly describing the source of the documents and their content.
c) A copy of the indictment, information and/or plea agreement.
d) Copies of documents, i.e., jury books, evidence admitted during trial, trial transcripts, if available.
e) Grand jury agent's workpapers and schedules admitted or referenced and discussed specifically in open court.
f) Grand jury agent's trial notes, if appropriate and useful to civil settlement.
g) Tax computations.
h) Any other pertinent and relevant public documents available.

·         The completed information item package should be forwarded through the first-line manager to the territory manager designee for civil disposition. If appropriate, the package should be associated with the case in suspense to be released for civil settlement.  (01-01-2003)
Unique Features

1.       IRS relinquishes control of a grand jury case to the U.S. Attorney. The examiner assigned to the grand jury investigation assists the U.S. Attorney with the consideration, resolution and review of technical issues related to the criminal charges being investigated.

2.       Evidence obtained during a grand jury investigation is protected under the secrecy provisions of Rule 6(e) of the Federal Rules of Criminal Procedure. Therefore, an examiner cannot disclose in a civil case any information obtained by the grand jury, unless the grand jury information has been made a matter of public record.

3.       An examiner assigned to a grand jury investigation is "tainted" for any subsequent civil examination.

4.       Examiner’s time should be charged to the applicable activity code:

·         Activity Code 815 Grand Jury — Non Narcotics Related

·         Activity Code 816 Grand Jury — Drug Enforcement Task Force Case

·         Activity Code 817 Grand Jury Narcotics Related — Other

5.       During a grand jury investigation, examiners should identify themselves as assistants to the U.S. Attorney and not an IRS employee. IRS credentials may only be used for identification purposes.

6.       Grand jury materials should be kept in a separate work area inaccessible to other IRS personnel not assisting the U.S. Attorney.

7.       The examiner’s workpapers will be part of the Cl grand jury files. These files will not be available for the civil examination without a Rule 6(e) court order. Workpapers, however, admitted or referenced and specifically discussed in open court are available for civil settlement. Workpapers referred to are usually the charts used for testimony.  (01-01-2003)
Civil Settlement

1.       Upon completion of the grand jury investigation, cases originating in an examination function will be released from Grand Jury Suspense and returned for civil settlement. Examiners who had access to grand jury information are "tainted" for civil settlement and cannot be assigned to the case. Rule 6(e) precludes the use of " matters occurring before the grand jury" in any subsequent civil action. Per Rule 6(e)(3)(B), Any person to whom matters are disclosed under subparagraph (A)(ii) of this paragraph shall not utilize that grand jury material for any purpose other than assisting the attorney for the government in the performance of such attorney's duty to enforce federal criminal law.

2.       The examiner may use information in public record, including the search warrant affidavit, indictment, plea agreement and other information in the court file. As discussed above, the grand jury revenue agent will gather this information during the grand jury investigation and at the conclusion of the grand jury investigation, forward the information to the territory manager designee.

3.       Since the taxpayer may not be convicted for all years in the indictment, information available may not be complete. A Rule 6(e) order may be obtained through the U.S. Attorney’s Office to disclose grand jury information when the information is needed "preliminarily to or in connection with a judicial proceeding." There must be a "particularized need" in that the information cannot be obtained from some other source. An IRS civil examination does not meet this requirement. There must be specific litigation, such as a Tax Court or District Court proceeding.

4.       The touchstone of Rule 6(e)’s applicability is whether the disclosed material would "elucidate the inner workings of the grand jury." The "inner workings" test would preclude disclosure of evidence which tended to reveal the identity and/or testimony of witnesses, the direction of the investigation and the deliberation of the grand jurors.

5.       The examiner should ask Cl if they have possession of specific documents known to be non-grand jury evidence. A memorandum from the field territory manager to the SAC should be prepared providing a brief explanation of the situation and the specific documents requested.

6.       Grand jury evidence cannot be released even when the taxpayer volunteers to execute a waiver authorizing disclosure. The taxpayer could furnish records in their possession even though the grand jury subpoenaed those very records.

7.       If a court determines the IRS has improperly used grand jury material, the court may refuse to admit the evidence, reverse the burden of proof and/or require the IRS to proceed with evidence not derived from the grand jury. Further, the court may decide to dismiss the case, without prejudice, due to government misconduct. If the court determined the IRS intentionally used grand jury material, attorney and legal fees could be awarded to the taxpayer.

25.1.6  Civil Fraud  (01-01-2003)

1.       This section discusses the procedures to follow in a civil fraud case.

2.       A civil fraud penalty case may be developed based on facts and circumstances of a civil examination or result from the completion of a criminal prosecution case.

3.       Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to civil fraud. Such evidence must show the taxpayer’s intent to evade the payment of tax which the taxpayer believed to be owing. Intent is distinguished from inadvertence, reliance on incorrect technical advice, honest difference of opinion, negligence or carelessness. In the case of a joint return, intent must be established for each spouse separately as required by IRC 6663(c) . The fraud of one spouse cannot be used to impute fraud by the other spouse. The civil fraud penalty may be asserted on one spouse only.

4.       Specific guidance on fraud indicators and the development of fraud may be found in IRM 25.1.1 and 25.1.2.

5.       IRM 20.1 provides specific procedures for assertion of the civil fraud penalty.  (01-01-2003)

1.       Civil fraud no longer requires a referral to CI. Determination of this penalty is the shared responsibility of the examiner, his/her group manager and the FRS . If agreement cannot be reached regarding the assertion of the civil fraud penalty, the decision will rest with the examiner and group manager.


For Service Center Examination employees: when the decision is made after consultation with the manager, fraud coordinator and the FRS that the assertion of the civil fraud penalty is indicated, please refer to IRM for procedures in transferring cases to the area office.

2.       Upon concurrence of the group manager and FRS , cases being developed for potential fraud should be updated to Status Code 17. Form 11661, Fraud Development Status may be utilized to document the decision to update the case to Status Code 17.

3.       For civil settlement of a prosecution case, the examiner should contact Cl to ascertain which criminal statutes the taxpayer was convicted of before attempting to resolve the related civil fraud penalty. The examiner should obtain a copy of the plea agreement or judgment notating the applicable criminal statutes and years. See 25.1.5 for procedures to utilize in securing nongrand jury materials for use in the civil settlement of cases investigated through grand jury procedures.

4.       In cases where fraud was considered and the civil fraud penalty is not being recommended, the examiner will explain in the workpapers why the penalty was not asserted.

5.       If criminal prosecution of a taxpayer has been recommended by CI to the Department of Justice, the civil fraud penalty or fraudulent failure to file may be removed only upon written recommendation or concurrence by Area Counsel. This rule applies also in the case of any related taxpayer involved in the same transaction and to any other year or period of the same taxpayer which is related to or affects the year or period for which criminal prosecution is recommended. Cases back for civil settlement should be updated upon receipt to AIMS Status Code 12. During the period of time, however, that the examiner is considering civil fraud in a case back for civil settlement, the case should be updated to AIMS Status Code 17. If it is later determined that the civil fraud penalty is not applicable, the case should be returned to AIMS Status Code 12.

6.       In statutory notice cases, Area Counsel must approve civil fraud penalties prior to issuance.  (01-01-2003)
Collateral Estoppel

1.       Examiners and managers should be aware of collateral estoppel and the important distinction it can have in civil tax fraud penalty cases.

2.       Collateral estoppel is a legal doctrine that prevents a taxpayer, who has been previously convicted of criminal tax evasion under 7201, from asserting a defense to the civil fraud penalty. " Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation." Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979). The courts routinely look to the presence of several factors in applying collateral estoppel. The issue for which estoppel is being sought must have been necessary in reaching the original decision (see Parklane case cited above), the party to be estopped had a "full and fair opportunity to litigate" the issue in the original suit - Montana v. United States, 440 U.S. 147, 154 (1979), and the issue must have been part of a valid and final judgment.'' Ashe v. Swenson, 397 U.S. 436, 443 (1970). The doctrine of collateral estoppel applies only to the years for which the taxpayer has been convicted. Intent must be established for non-conviction years.

3.       A conviction under 7206(1), false return, does not collaterally estop the taxpayer from asserting a defense to the civil fraud penalty since conviction under 7206(1) does not require proof of fraudulent intent to evade federal income taxes. In these cases, additional development will be needed to establish the taxpayer’s intent to evade payment of a tax to be due and owing.  (05-19-1999)
Form 6809

1.       Form 6809 (Civil Fraud Penalty Monitoring Form) is required in order to monitor all cases where the civil fraud penalty is an issue.

2.       A separate Form 6809 must be prepared for each person or legal entity involved. However, only one Form 6809 is prepared for a joint return.

3.       Upon updating a case to Status Code 17, prepare Form 6809 in triplicate, completing items 1 – 11. Retain the original and one copy in the case file. Forward one copy to the fraud referral specialist ( FRS ).

4.       When the case is ready to close, the examiner will complete items 12a–12f. Upon final disposition of the case, the completed Form 6809 is provided to the FRS .  (01-01-2003)
Case Closing

1.       Closing a fraud case requires an entry of "C" or "F" on the appropriate line of Form 5344 (currently Line 38 of Form 5344, Revised 1–2002) to ensure the capture of the penalty on AIMS. Form 5599, EO Examined Closing Record should be utilized when closing TEGE cases.

2.       Form 3198, Special Handling Notice, may be used for routing of civil fraud cases.


25.1.7  Failure to File  (05-19-1999)

1.       This section discusses the various procedures concerning fraud in a failure to file case.

2.       Willful failure to file a tax return is a misdemeanor per IRC Section 7203. In egregious cases, willful failure to file may be elevated to a felony under IRC 7201 Tax Evasion. In addition, a civil penalty for fraudulent failure to file may be applicable per IRC Section 6651(f).  (01-01-2003)
Prescreening Nonfilers

1.       On the initial screening of a nonfiler case, the compliance employee should determine if known facts indicate potential fraud. Items to be considered in addition to those previously identified in IRM 25.1.3 are:

·         History of nonfiling;

·         Repeated contacts by the Service;

·         Indications that the non-filer had knowledge of filing requirements (i.e., professional with an advanced education, the person who works directly in the tax field, and individual had previously filed, etc.);

·         Age and occupation of the taxpayer;

·         Substantial tax liability after withholding credits and estimated tax payments;

·         Large number of cash transactions (i.e., purchases by cash, large cash deposits, etc. as evidenced by CBRS printout in the case file), Indications of significant income per Information Return Processing (IRP) or Taxpayer Delinquency Investigation ( TDI ) documents (i.e., substantial interest and dividends earned, investments in IRA accounts, stock and bond transactions, high mortgage interest paid). Consideration should be given to any allowable expenses the taxpayer may have to offset self-employment income identified.

2.       If it appears indications of fraud are present, the compliance employee will discuss the case with the group manager. If the group manager concurs there is possible fraud, the fraud referral specialist ( FRS ) will be contacted. When feasible, a conference will be held between the compliance employee, group manager and FRS .

3.       If the possibility of fraud exists,

A.                  DO NOT SOLICIT tax returns. If returns are submitted, they should be accepted;

B.                  DO NOT VOLUNTEER ADVICE to the taxpayer concerning any course of action he/she should follow;

C.                  DO NOT DISCUSS tax liabilities, penalties, fraud, or referral possibilities with the taxpayer.  (01-01-2003)
AIMS (Examination Function only)

1.       In non-filer cases in which a criminal referral is a possibility, Master File controls can be requested using push code 037, Potential Investigation Referral. A Substitute For Return Transaction Code 150 will post to the module, but this will not harm any subsequent criminal investigation.

2.       The AIMS project code should be changed to 149 — Non/filer-Referral for Fraud.  (01-01-2003)
Development of Fraud

1.       If indicators of fraud are evident and with the concurrence of the FRS , the case will be updated to AIMS status code 17. The employee will proceed to fully develop the potential fraud issue(s) with the guidance and recommendations of the group manager and FRS . The following actions should assist the employee in developing firm indications of fraud.

a.       Interview the taxpayer to determine the reason or the intent of the taxpayer’s noncompliance.

b.       Ask sufficient questions to determine the extent of the delinquency, including the periods and tax due.

c.       Document verbatim, if possible, the questions asked and the taxpayer’s response or lack of response.

d.       Identify any personal reasons that could affect the taxpayer’s ability to comply. If the information is unavailable from the taxpayer, attempt to secure the information from third party sources.

2.       Verify income from all available sources. Methods of income verification include, but are not limited to:

A.                  CBRS data;

B.                  IDRS (cc: INOLE, IROLE, SUPOL, IRPTR, IRPOL);

C.                  Securing copies of W–2’s, 1099’s from employers;

D.                  Securing copies of checks issued to taxpayer from 1099 issuer;

E.                  Examining taxpayer’s books and records of income and expenses;

F.                  Reviewing the last return filed. This will assist identifying income sources as well as deductions and exemptions used in tax computations;

G.                 Securing current financial information including checking public records for assets and a physical observation of the taxpayer’s residence, place of business or both. This information will be used to determine whether the taxpayer is prospering and has the ability to pay the taxes, or not complying due to an inability to pay taxes.

3.       Access to a full credit report is governed by the Fair Credit Reporting Act (Act). In addition to releasing credit reports based on five "permissible" purposes, the Act also provides for the release of credit reports in response to court order or in accordance with the consumer's written instructions. The Federal Trade Commission also interprets that consumer reporting agencies may also release full credit reports in compliance with a summons issued under IRC 7609. In cases where a taxing authority creditor such as the Service has taken steps to reduce the taxpayer's (consumer's) liability to judgment, imposed a lien on the taxpayer's property or entered into an offer-in-compromise or settlement agreement to dispose of the liability, a credit relationship exists as contemplated by the Act. Under those circumstances, the Service may obtain a full credit report of a sole proprietor, partner or fiduciary without a court order, summons or written permission. If subsequent to receipt of a full credit report for a BAL DUE investigation, fraud is discovered for a DEL RET return or a previously filed return or unreported income is discovered, a summons must be issued under 7609 for another credit report. Finally, in order to use a full credit report as a basis for a referral to CI, a summons must be issued in accordance with 7609, because of the third party record keeper notice requirement. The Service, however, may not obtain a full credit report of a sole proprietor, partner or fiduciary without a summons where there is no lien against the individual taxpayer.  (01-01-2003)
Criminal Referral

1.       Refer to the Law Enforcement Manual (LEM) for the criminal criteria when considering submission of a criminal fraud referral on a non-filer.

2.       When the group manager and FRS concur that firm indications of fraud exist and the criminal criteria are met, the compliance employee will prepare Form 2797, Referral Report for Potential Criminal Fraud. The Form 2797 should be prepared as described in IRM 25.1.3.  (01-01-2003)
Secured Delinquent Returns

1.       Delinquent returns ( DEL RET's) secured by compliance employees that have substantial understatements of income and/or substantial overstatements of deductions should be considered for referral to Cl if it is determined that criminal criteria are met. The group manager and FRS should become involved as discussed in IRM

2.       Collection function employees should consider a referral to the examination function if these returns do not meet criminal criteria.  (01-01-2003)
Assessment Procedure for Fraudulent Failure to File Penalties

1.       If the taxpayer files a delinquent return after a fraudulent failure to file, the period of limitations on assessment begins to run. Furthermore, the portion of the Fraudulent Failure to File (FFTF) penalty based on the tax reported on the delinquent return is not subject to deficiency procedures, but is an immediately assessable penalty. Therefore, the portion of the FFTF penalty based on the tax reported on the delinquent return should be assessed as soon as possible after the return is filed and should not be included in any deficiency notice. If the Service determines a deficiency, only that portion of the FFTF attributable to the deficiency should be included in the notice of deficiency.  (01-01-2003)
Civil Closure

1.       If the criminal criteria are not met, the compliance employee will complete the investigation and attempt to secure the nonfiled return(s).

2.       Compliance employees should contact the FRS , if necessary, for assistance in developing the civil fraud penalty. Further direction for the assertion of the penalties is contained in IRM 20.1, Penalties Handbook.

3.       Penalties under IRC Sections 6651(f) or 6663 should be proposed only where evidence clearly indicates the non-filer fraudulently failed to file a return to evade tax. Penalties should not be used as a bargaining tool.

4.       In non-filer cases prosecuted under IRC 7203 returned for civil settlement, a conviction of willful failure to file a federal return only collaterally estops a taxpayer from denying liability under IRC 6651(a), the delinquency penalty. The fraudulent failure to file or civil fraud penalty is not automatic.

5.       If the non-filer is prosecuted under IRC 7201, the fraud penalty is automatic. The taxpayer is collaterally estopped from denying liability for the civil fraud or fraudulent failure to file penalty.

6.       The mere fact of failing to file a return does not constitute sufficient evidence to sustain fraud. Other overt acts of evasion must be identified to impose the fraudulent failure to file or civil fraud penalty. In addition to the previously listed indications of fraud, the following examples are specific to failure to file cases:

A.      Attempts by the non-filer to conceal or transfer assets to evade collection of tax later assessed;

B.      Taxpayer furnishes a false W–4 to his employer;

C.      Experience of taxpayer in tax matters such as law professor, CPA or tax attorney;

D.      Taxpayer’s use of dummy business entities, bank accounts opened under assumed names and false SSNs in an attempt to conceal the identity of income/owner;

E.      A prior history of criminal tax prosecutions for Title 26 violations:

F.      Taxpayer’s filing of returns with third parties such as lending institutions with the intent to secure loans when no returns have been filed.

7.       Area Counsel must provide written approval for the non-assertion of the civil fraud or fraudulent failure to file penalty if criminal prosecution of a taxpayer has been recommended by CI to the Department of Justice. 

25.1.8  Collection Function  (01-01-2003)

1.       This section discusses the collection function which is an important cross-functional partner in the detection and referral of fraud issues. The very nature of collection work lends itself to numerous areas of fraudulent noncompliance. The following highlight some of the fraudulent areas encountered in varying degrees by collection function personnel. Refer to IRM Sections 25.1.1 through 25.1.4 for detailed guidance in developing indications of fraud and completing the fraud referral process. Of particular value to collection function personnel are the sections devoted to failure to file and bankruptcy, 25.1.7 and respectively. Finally, collection function personnel should also refer to the Revenue Officers Readiness Guide, Training #2278-002 (Rev. 04/2000) for invaluable assistance in recognizing and developing fraud in the collection arena.  (01-01-2003)
Trust Fund Violations

1.       A substantial part of the collection function's work involves unpaid payroll taxes and delinquent Form 941 returns. Many of these cases involve prior quarters as well as current quarter pyramiding. When a taxpayer's noncompliance exceeds the criminal criteria set in Law Enforcement Manual (LEM) 5.4, revenue officers should consider the potential for:

A.      Implementing IRC 7512, Separate Accounting for Certain Collected Taxes, Etc., and/or

B.      Implementing Treas. Reg. 31.6011(a)-5, Monthly Filing rules,

C.      Pursuit of IRC 7202, Willful Failure to Collect or Pay Over Tax, and

D.      Pursuit of IRC 7201, Attempt to Evade or Defeat Tax.

2.       Before requesting permission to implement the special rules for deposit and filing, Letter 903 must be properly issued to potentially responsible individuals. Refer to IRM 5.7.2 for additional instructions.

3.       Additionally, since Willful Failure to Collect or Pay over Tax, and Attempts to Evade or Defeat Tax prosecutions require the government to establish that responsible persons knew of their tax responsibilities and willfully failed to perform them, Letter 903 should be issued early in the development of any employment tax case where an indication of fraud is present and the criteria in LEM 5.4 are met. Although Letter 903 is primarily a warning of the potential for additional enforcement actions, it also provides specific instructions and a notice of personal responsibility to the potentially responsible individuals.

4.       Collection function employees are responsible for making recommendations involving the special deposit rules authorized under IRC 7512, and/or the monthly filing procedures contained in Treas. Reg. 31.6011(a)-5. Letter 903 is issued to notify taxpayers that continued failure to comply with standard deposit and filing rules may result in imposition of the special rules and warns of the potential for criminal prosecution for failure to make special deposits in accordance with IRC 7512.

5.       Implementation of the IRC 7512 special deposit rules requires written concurrence from CI if criminal prosecution may be considered for a violation. Use Form 2674, Report of Trust Fund Tax Violations to request necessary approvals from Compliance management and CI. In cases where only civil sanctions (e.g., an injunction) are contemplated, a revenue officer group manager may approve implementation of IRC 7512 procedures. See IRM

6.       Form 2481, Notice to Make Special Deposit of Taxes, is provided for the purpose of informing taxpayers that the special deposit requirements are being invoked. The taxpayer is afforded a reasonable opportunity to comply with Letter 903 (DO) before Form 2481 is hand delivered to the taxpayer compelling the taxpayer to comply with IRC 7512(b).

7.       The Collection function employee will advise the group manager and follow guidelines for making a criminal referral ( IRM 25.1.3) or civil referral when taxpayers fail to comply with provisions of IRC 7512.

8.       Collection function employees will monitor the taxpayer's actions and keep the group manager and CI informed while the case is in fraud referral status.  (01-01-2003)
Evasion of Payment

1.       IRC 7201 includes two separate offenses: (a) the willful attempt to evade or defeat the assessment of a tax and (b) the willful attempt to evade or defeat the payment of a tax. Refer to Exhibit 25.1.1-1 for a description of the elements necessary for prosecution of an IRC 7201 violation. The affirmative acts of evasion associated with evasion of payment cases almost always involve some form of concealment of the taxpayer’s ability to pay the tax due and owing or the removal of assets from the reach of the IRS . It should be noted that obstinately refusing to pay taxes due, possession of the funds needed to pay the taxes, and even the open assignment of income, without more, do not meet the requirement of the affirmative acts necessary for this felony evasion charge.

2.       In addition to the affirmative acts/indicators listed in IRM, other examples of affirmative acts of evasion of payment include: placing assets in the names of others; dealing in currency; causing receipts to be paid through and in the name of others; causing debts to be paid through and in the name of others; paying creditors instead of the government; bankrupting a corporation and hiding the assets to avoid payment of employment taxes and a complete change of taxpayer identity.  (01-01-2003)
Fraudulent Offers In Compromise

1.       IRM provides a comprehensive discussion of indications of fraud relating to Offers In Compromise. In addition to those indications of fraud, employees should be alert to the potential for false statements under penalty of perjury, i.e., relating to Form 433-A and Form 433-B. Examples of these include, but are not limited to:

A.      False or fraudulent valuation statements or appraisals in support of Form 433-A or Form 433-B,

B.      Sham loans and mortgages,

C.      Significant omission of asset or income information, and

D.      Reclassification of wage income.

2.       When initial indications of fraud are identified, the collection function employee will discuss the case with the group manager and fraud referral specialist. Final disposition of the offer will be held in abeyance until the potential for fraud is resolved or a referral to CI is made.

3.       If the referral is accepted, Cl will inform the taxpayer of the fraud investigation.

4.       After CI has notified the taxpayer of it's investigation, the collection function employee will:

A.      Suspend all collection activity except those approved by CI;

B.      Advise the taxpayer of the suspension of the collection statute if the Service holds the offer for future consideration;

C.      Inform the taxpayer the offer will be rejected and inform him/her of the option to withdraw the offer. If the offer is not withdrawn and the Service intends to reject it, a rejection letter specifying the reasons for rejection will be sent to the taxpayer.  (01-01-2003)
Summons Referral

1.       In most instances, summons enforcement will be conducted as an IRC 7604 civil matter, through Area Counsel, and is directed toward requiring the person summoned to comply (see IRM 25.5.10).

2.       Criminal prosecution under 7210 is rarely utilized and should be considered only after review of IRM 5.17.6, relating to criminal proceedings and civil enforcement and consultation with Area Counsel.  (01-01-2003)
Coordination with CI

1.       Where CI case controls (TC 914) are active in any module, revenue officers will contact CI to discuss potential problems prior to initiating contact with taxpayers or their representatives (see IRM 5.1.5).

2.       When balancing civil and criminal priorities, consider the impact and/or lost revenue potential relating to:

A.      Trust Fund Recovery Penalty and Transferee assessment statute limitation dates (ASED),

B.      Collection Statute Expiration Dates (CSED),

C.      Pyramiding of collected or withheld taxes, and

D.      Collection jeopardy.

3.       Refer to Policy Statement P-4-84 ( IRM 1.2.1, Policies of the Internal Revenue Service) and IRM 5.1.5, prior to making determinations to suspend collection.

4.       Consistent with the CI Manager's Handbook ( IRM 1.4, Resource Guide for Managers), joint quarterly four-ways should be conducted to review the status of the investigation and plan activities to be accomplished by the cooperating officer and special agent in the next quarter. The CI SSA should initiate contact with the revenue officer group manager to schedule required quarterly four-ways. During each quarterly meeting, investigative progress and issues relating to balancing civil and criminal priorities relating to taxpayers assigned to group inventory should be discussed.

5.       Disagreements between civil and criminal priorities should be brought to the attention of the SBSE territory manager and CI special agent in charge for resolution. Disagreements will be elevated to the area director and Director, Field Operations, CI for resolution. If the disagreement can not be resolved, the issue will be elevated to the next appropriate management level for final resolution.  (01-01-2003)
Collection Case Disposition

1.       With the concurrence of the fraud referral specialist ( FRS ), RO group managers, or their designee, will input ICS Sub Code 910 to the taxpayer case. Sub Code 910 will remain intact until the group manager and FRS concur on its removal. This usually occurs when fraud development has ceased or a criminal referral has been declined.

2.       When the revenue officer, group manager, and fraud referral specialist agree that a firm indication of fraud has been established, a Form 2797 referral to CI will be completed and all collection activity will be discontinued until further advice from CI is received.

3.       Refer to IRM for instructions relating to disposition of Delinquent Return investigations ( DEL RET’s). Do not use TC 596 to close BMF DEL RET modules.

4.       CI will initiate the input of TC 914 controls to control the cases accepted for criminal investigation. If TC 914 is present in some tax periods, but not in others, collection function employees should contact CI to determine whether or not collection should be suspended and additional TC 914’s should be initiated by CI.

5.       When the TC 914 is posted to all assigned tax modules, the Revenue Officer will contact Technical Support to request IDRS TSIGN to DOAO-6993, in accordance with established procedures (See IRM 5.1.5).

25.1.9  Tax Exempt and Government Entities (TEGE)  (01-01-2003)

1.       This section outlines guidelines which apply to TEGE determination letter applications and returns under the TEGE jurisdiction.

2.       Abuses or fraudulent practices and self dealing in the employee plans and exempt organizations areas jeopardize both employee pensions and the collection of tax revenues.

3.       Coordination with the examination function and the fraud referral specialist ( FRS ) is required (see IRM IRM Sections 25.1.1 through 25.1.3 provide specific guidelines for developing and referring potential fraud cases.  (01-01-2003)
Fraud in Employee Plans

1.       The Employee Retirement Income Security Act of 1974 (ERISA) provides criminal and civil penalties for specified violations. The IRS (under Title II) and the Department of Labor (under Title I) share jurisdiction over ERISA.

2.       The Secretary of Labor also has authority to investigate Title 29 offenses. These offenses relate to reporting, disclosure, participation, vesting, funding and fiduciary responsibilities. Consequently, the Secretary of Labor and the Secretary of Treasury may be involved in prosecuting the same case.

3.       Qualified employee plans receive favored tax treatment through a deduction for contributions by the employer, tax exemption for the related trust and deferral of income by the employee. These tax advantages can be used in criminal cases to meet the requirements that a tax be due and owing as described in IRC 7201 (Attempt to Evade or Defeat Tax) and that damage inures to the Government as described in IRC 7206 (Fraudulent or False Statement — See IRM

4.       IRC 6058 governs the filing of Form 5500, Annual Return/Report of Employee Benefit Plan. Cl has jurisdiction over Form 5500 violations.  (01-01-2003)
Fraud in Exempt Organizations

1.       The Tax Reform Act of 1969 imposed new and stringent requirements with respect to exempt organizations. Penalties were established for:

·         Failure to file information returns

·         Repeated and willful violations of Chapter 42 provisions

·         Willful violation of annual reporting requirements of private foundations

2.       IRC 6033 governs the filing requirements of exempt organizations. IRC 6011 requires the filing of certain returns by exempt organizations.  (01-01-2003)
Health Care Fraud

1.       Health care fraud is an area of noncompliance. Cl participates in the DOJ-mandated Health Care Fraud Task Force under the direction of the United States Attorneys’ offices nationwide. TEGE will also participate, as necessary, in the Health Care Fraud Task Force.

2.       Cl investigations cover a wide range of frauds, including false claims, kickbacks/bribes, durable medical equipment schemes, staged/caused accidents, clinic mills, drug diversion, rolling labs, and psychiatric mills.  (01-01-2003)
Taxpayer Defined

1.       The term taxpayer for TEGE purposes is anyone who participates in any way in filing an application for exempt status or determination, preparing required returns, operating a plan, trust or organization.  (01-01-2003)
Criminal Provisions

1.       IRC 7206(1) (Declarations under penalties of perjury) is the criminal provision most useful to TEGE.

A.      IRC 7206(1) applies to tax returns as well as other documents. See US v Holroyd, 732 F.2d 1122 for a discussion of application of IRC 7206(1) when the taxpayer filed a false statement as opposed to a false return. A prima facie violation of IRC 7206(1) can be proven in the absence of a provable tax deficiency.

B.      Applications for qualification of employee plans and exempt organizations, and information returns and reports are subscribed under the penalty of perjury.

2.       For example, filing a determination letter application containing false statements or submitting falsified documents in support of such an application or submitting a falsified annual return for an employee plan (or exempt organization) would give rise to a potential IRC 7206(1) prosecution if the falsifications are shown to be willful and material.

3.       Under IRC 7201, filing a false determination letter application, annual return or registration statement can also be an act leading to tax evasion.

4.       Under IRC 7203, failure to file any required return/statement dealing with an employee plan may be subject to criminal penalties in addition to civil penalties.

5.       Many return/reports are prepared by third parties. Under IRC 7206(2), preparers of false pension plan documents can be prosecuted.  (05-19-1999)
Referrals to Cl

1.       Use Form 2797 (Referral Report for Potential Criminal Fraud Cases) to refer cases to CI through the FRS . Adapt the form for TEGE’s use by inserting "TEGE" wherever the word " audit" or "examination" appears.

2.       If a case involving a collateral examination results in a fraud referral, TEGE and the examination function will coordinate the referrals.  (05-19-1999)
Joint Investigations

1.       TEGE responsibilities with respect to any case referred for investigation by Cl include -

·         Determining the qualification status

·         Analyzing legal documents (plan and trust agreements, enabling document, etc.)

·         Examining trust or organization operations or proposed operations

·         Inspecting annual returns under TEGE jurisdiction

·         Protecting the statutory period for assessment of TEGE returns

·         Providing technical advice

·         Assisting the special agent in interviews and other areas as needed

2.       See IRM 25.1.4 for additional guidelines regarding joint investigations.  (01-01-2003)
Identifying Penalty File Examination Cases

1.       To facilitate identification by service centers of closed TEGE fraud cases to be filed in the penalty file, TEGE must attach Form 3198, Special Handling Notice, to the folder of each case file of:

A.      Taxpayers who have been prosecuted whose civil liabilities (tax and additions) are determined and whose cases are closed by TEGE; and

B.      Taxpayers whose underpayment of tax is determined and whose cases are closed in TEGE with assertion of an additional 75% (see IRC 6663(a) of the underpayment due to fraud but without involving prosecution.


Form 3198 should be annotated, "Civil Penalty Assessment." See IRM for additional TEGE Penalty Processing Procedures.

25.1.10  LMSB Fraud Procedures  (01-01-2003)

1.       This section outlines guidelines which apply to LMSB.

2.       Active involvement of the team manager is essential to the success of a fraud referral. When an examiner suspects a potentially fraudulent situation, the employee will discuss the case at the earliest possible convenience with his/her manager. To further assist field personnel in identifying and developing criminal fraud referrals, SB/SE Compliance established groups of fraud referral specialists ( FRS ) to assist technical personnel in all IRS operating divisions.

3.       The detection and deterrence of fraud is every compliance employee's responsibility and should be a top priority when discovered. Any questions regarding LMSB fraud procedures should be referred to your respective industry fraud analyst.  (01-01-2003)
FRS within LMSB

1.       Team Managers should contact their local FRS Group Manager when indications of fraud are uncovered during an examination. A list of FRS 's and their managers may be found on the National Fraud Program web site at <>. Upon discussion of the case facts and potential fraud indicators with the FRS Group Manager, an FRS may be designated to assist with the development of the fraud issues(s). The FRS 's are trained fraud experts and can provide invaluable assistance in fraud identification and development.  (01-01-2003)
Referrals to CI

1.       When firm indications of fraud are present, a referral to CI will be prepared using Form 2797. Refer to IRM for information in preparing Form 2797. All criminal referrals must be routed through the FRS Group Manager for review, concurrence and forwarding to the new Criminal Investigation Lead Development Center (LDC).  (01-01-2003)
Referral Evaluation

1.       The CI Lead Development Centers will screen incoming referrals to determine if they meet CI’s criminal criteria, have any barriers to prosecution and support CI’s workplan. If a referral does not meet the criminal criteria or there is a barrier to prosecution or there is a question as to whether the referral supports CI’s "workplan," the LDC manager will follow the guidance contained in IRM and return the referral to LMSB through the FRS manager. If the referral meets the criminal criteria, there are no barriers to prosecution and the referral supports CI’s workplan , the LDC will immediately forward the referral to the appropriate CI field office for evaluation.

2.       Within 10 workdays of the receipt of the referral by the evaluating field office, CI will contact the referring (team) manager to schedule and conduct an initial conference and to obtain additional information such as listed in IRM and Within 30 workdays of the receipt of the referral by the evaluating field office, the parties will meet again at a disposition conference to discuss CI’s decision to accept or decline the referral. CI will provide feedback to LMSB as to their decision. If accepted, CI will follow the guidance contained in IRM If declined, CI will follow the guidance contained in IRM  (01-01-2003)
Civil Fraud

1.       Civil Fraud no longer requires a referral to CI. The determination of this penalty is a shared responsibility of both the examiner and his/her team manager. However, FRS 's and FRS Group Managers are available for assistance. Furthermore, in statutory notice cases, Area Counsel must still approve the civil fraud penalty prior to the issuance of the notice.  (01-01-2003)
Third Party Examinations

1.       Potential "third party" examinations that may have indications of fraud should be either secured for examination by the LMSB team or routed through the local SB/SE Area PSP Office via Form 5346, Examination Information Report.  


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